Question 1

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

Question 2

Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?

Accepted Answer

A)  by increasing the penalties to firms for providing false information 
B)  by increasing the independence of auditors and clients 
C)  by decreasing the non-audit fees that an auditor can receive from a client 
D)  by forcing companies to audit financial statements they release 
A)  by increasing the penalties to firms for providing false information 
B)  by increasing the independence of auditors and clients 
C)  by decreasing the non-audit fees that an auditor can receive from a client 
D)  by forcing companies to audit financial statements they release

Question 3

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. 
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 4

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?

Accepted Answer

A)  The assets should have been listed on the balance sheet as long-term assets. 
B)  Cash raised by selling assets should not be recorded as revenue. 
C)  The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&
A)  or notes to the financial statement. 
D)  Both B and C are deceptive. 
A)  The assets should have been listed on the balance sheet as long-term assets. 
B)  Cash raised by selling assets should not be recorded as revenue. 
C)  The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&
A)  or notes to the financial statement. 
D)  Both B and C are deceptive.

Question 5

Which of the following balance sheet equations is INCORRECT?

Accepted Answer

A)  Assets - Liabilities = Shareholders' equity 
B)  Assets = Liabilities + Shareholders' equity 
C)  Assets - Current liabilities = Long-term liabilities 
D)  Assets - Current liabilities = Long-term liabilities + Shareholders' equity 
A)  Assets - Liabilities = Shareholders' equity 
B)  Assets = Liabilities + Shareholders' equity 
C)  Assets - Current liabilities = Long-term liabilities 
D)  Assets - Current liabilities = Long-term liabilities + Shareholders' equity

Question 6

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.

Accepted Answer

A)  NYSE Enforcement Board 
B)  Accounting Standards Board 
C)  Securities and Exchange Commission (SE
C)  
D)  auditor 
A)  NYSE Enforcement Board 
B)  Accounting Standards Board 
C)  Securities and Exchange Commission (SE
C)  
D)  auditor

Question 7

Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $millions)
 
Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to ________.

Accepted Answer

A)  $271.8 million 
B)  $108.7 million 
C)  $163.1 million 
D)  $135.9 million 
A)  $271.8 million 
B)  $108.7 million 
C)  $163.1 million 
D)  $135.9 million

Question 8

What are the four financial statements that all public companies must produce?

Accepted Answer

1. balance sheet
2. income sta

Question 9

In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.

Accepted Answer

A) True 
 B)False

Question 10

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year?

Accepted Answer

A)  Net property, plant, and equipment would rise to $126 million, and total assets and stockholders' equity would be adjusted accordingly. 
B)  Net property, plant, and equipment would fall to $116 million, and total assets and stockholders' equity would be adjusted accordingly. 
C)  Long-term liabilities would rise to $131 million, and total liabilities and stockholders' equity would be adjusted accordingly. 
D)  Long-term liabilities would fall to $111 million, and total liabilities and stockholders' equity would be adjusted accordingly. 
A)  Net property, plant, and equipment would rise to $126 million, and total assets and stockholders' equity would be adjusted accordingly. 
B)  Net property, plant, and equipment would fall to $116 million, and total assets and stockholders' equity would be adjusted accordingly. 
C)  Long-term liabilities would rise to $131 million, and total liabilities and stockholders' equity would be adjusted accordingly. 
D)  Long-term liabilities would fall to $111 million, and total liabilities and stockholders' equity would be adjusted accordingly.

Question 11

The above diagram shows a balance sheet for a certain company. If the company pays back all of its accounts payable today using cash, what will its net working capital be?

Accepted Answer

A)  $131 million 
B)  $6 million 
C)  $88 million 
D)  $45 million 
A)  $131 million 
B)  $6 million 
C)  $88 million 
D)  $45 million

Question 12

AOS Industries Statement of Cash Flows for 2008
 
Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008?

Accepted Answer

A)  It would have $3,000,000 less cash at the end of 2008. 
B)  It would have $2,925,000 less cash at the end of 2008. 
C)  It would have $1,500,000 less cash at the end of 2008. 
D)  It would have an additional $7,500,000 in cash at the end of 2008. 
A)  It would have $3,000,000 less cash at the end of 2008. 
B)  It would have $2,925,000 less cash at the end of 2008. 
C)  It would have $1,500,000 less cash at the end of 2008. 
D)  It would have an additional $7,500,000 in cash at the end of 2008.

Question 13

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. 
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 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 
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

A 30-year mortgage loan is a ________.

Accepted Answer

A)  long-term liability 
B)  current liability 
C)  current asset 
D)  long-term asset 
A)  long-term liability 
B)  current liability 
C)  current asset 
D)  long-term asset

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. 
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

State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial statements.

Accepted Answer

Examples of some fir

Question 18

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. 
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 19

Luther Corporation
Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions)
 
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.

Accepted Answer

A)  3.45 
B)  1.72 
C)  0.86 
D)  2.41 
A)  3.45 
B)  1.72 
C)  0.86 
D)  2.41

Question 20

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 
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

Exam 2: Introduction to Financial Statement Analysis

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

Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?

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

Which of the following balance sheet equations is INCORRECT?

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.

Luther Corporation Consolidated Income Statement Year ended December 31 (in $millions) Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to ________.

What are the four financial statements that all public companies must produce?

In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year?

The above diagram shows a balance sheet for a certain company. If the company pays back all of its accounts payable today using cash, what will its net working capital be?

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

A 30-year mortgage loan is a ________.

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

State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial statements.

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?

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)?

Corporate Finance and the Financial Manager

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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