Deck 2: Introduction to Financial Statement Analysis

Question 1

Use the table for the question(s) below.
$\begin{array} { l } \text { Balance Sheet }\\\begin{array} { l } \text { Assets}& \text { Liabilities}\\\begin{array}{l}\text { Current Assets }\\\hline\text { Cash } & 50 \\\text { Accounts receivable } & 22 \\\text { Inventories } & 17 \\\text { Total current assets } & 89\\\end{array}&\begin{array}{l}\text { Current Liabilities }\\\hline\text { Accounts payable } & 42 \\\text { Notes pavable/short-term debt } & 7\\\\\text { Total current liabilities }&49\\\end{array}\\\\\begin{array}{ll}\text {Long-Term Assets }\\\hline\text {Net property, plant, }\\\text { and equipment } & 121 \\ \text { Total long-term assets } & 121\\\\\\\text { Total Assets }&210\\\\\end{array}&\begin{array}{ll}\text { Long-Term Liabilities }\\\hline\\\text { Long-term debt } & 128 \\\text { Total long-term liabilities } & 128 \\\text { Total Liabilities } & \mathbf{1 7 7} \\\text { Shareholders' Equity } & 33 \\\text { Total Liabilities and } & 210 \\\text { Shareholders' Equity } &\end{array}\end{array}\end{array}$


-The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the company's net working capital?

A) $33 million
B) $7 million
C) $32 million
D) $40 million

Answer 1

$40 million

Question 2

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?

A) the inventory of chemicals used to produce the drugs made by the company
B) a patent for a drug held by the company
C) the cash reserves of the company
D) commercial paper held by the company

Answer 2

a patent for a drug held by the company

Question 3

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) It ensures that important information is not omitted and superfluous information is not included.
B) It ensures that information on the performance of private companies is readily available to the public.
C) It makes it easier to compare the financial results of different firms.
D) It is easier to find specific information in such a report if it is laid out in a clear and consistent manner.

Answer 3

It makes it easier to compare the financial results of different firms.

Question 4

Which of the following is likely to have contributed to the failure of HIH Insurance?

A) unsupervised delegated authority
B) rapid expansion
C) fraudulent reporting
D) All of the above contributed to the failure of HIH.

Question 5

$\begin{array} { l } \text { Balance Sheet }\\\begin{array} { l } \text { Assets}& \text { Liabilities}\\\begin{array}{l}\text { Current Assets }\\\hline\text { Cash } & 50 \\\text { Accounts receivable } & 22 \\\text { Inventories } & 17 \\\text { Total current assets } & 89\\\end{array}&\begin{array}{l}\text { Current Liabilities }\\\hline\text { Accounts payable } & 42 \\\text { Notes pavable/short-term debt } & 7\\\\\text { Total current liabilities }&49\\\end{array}\\\\\begin{array}{ll}\text {Long-Term Assets }\\\hline\text {Net property, plant, }\\\text { and equipment } & 121 \\ \text { Total long-term assets } & 121\\\\\\\text { Total Assets }&210\\\\\end{array}&\begin{array}{ll}\text { Long-Term Liabilities }\\\hline\\\text { Long-term debt } & 128 \\\text { Total long-term liabilities } & 128 \\\text { Total Liabilities } & \mathbf{1 7 7} \\\text { Shareholders' Equity } & 33 \\\text { Total Liabilities and } & 210 \\\text { Shareholders' Equity } &\end{array}\end{array}\end{array}$


-A 30-year mortgage loan is a

A) Current Liability.
B) Long-Term Asset.
C) Long-Term Liability.
D) Current Asset.

Question 6

The International Financial Reporting Standards set out by the International Accounting Standards Board are NOT accepted by the exchanges in which of the following countries or regions?

A) Germany
B) France
C) United Kingdom
D) United States

Question 7

Use the table for the question(s) below
$\begin{array}{l}\text { Income Statement for CharmCorp: }\\\begin{array} { l r r } & 2011 & 2012 \\\text { Total sales } & 600 & 540 \\\text { Cost of sales } & - 532 & - 488 \\\hline \text { Gross Profit } & 68 & 52 \\\text { Selling, general, } & & \\\text { and administrative expenses } & - 36 & - 21 \\\text { Research and development } & - 4 & - 5 \\\text { Depreciation and amortisation } & - 5 & - 5 \\\hline \text { Operating Income } & 23 & 21 \\\text { Other income } & 1 & 5 \\\hline \text { Earnings before interest } & & \\\text { and taxes (EBIT) } & 24 & 26 \\\text { Interest income (expense) } & - 7 & - 7 \\\hline \text { Pretax income } & 14 & 19 \\\text { Taxes } & - 4 & - 5 \\\hline \text { Net Income } & 10 & 14\end{array}\end{array}$

-Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp has 6 million shares outstanding, and its managers and employees have stock options for 1 million shares, what is its diluted EPS in 2012?

A) $2.33
B) $1.42
C) $1.67
D) $2.00

Question 8

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

A) The value of the firm's assets are greater than their liquidation value.
B) The firm's market value is more than its book value.
C) Investors believe the company's assets are not likely to be profitable as its market value is worth less than its book value.
D) Investors may consider this firm to be a growth company.

Question 9

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?

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

Question 10

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?

A) market debt-equity ratio
B) current or quick ratio
C) debt-equity or equity multiplier ratio
D) market-to-book ratio

Question 11

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

A) It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows.
B) It will be depreciated over time on the income statement and subtracted as a capital expenditure 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 12

The notes to the financial statements would be LEAST likely to be used for which of the following purposes?

A) to explain the method of accounting that was used in the preparation of the financial statements
B) to show how the value of assets listed in the financial statements were arrived at
C) to disclose the financial implications of any off balance sheet transactions
D) to provide information regarding the context in which these financial numbers were generated

Question 13

Which of the following firms would be expected to have a high ROE based on that firm's high operating efficiency?

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

Question 14

Use the table for the question(s) below.
$\begin{array} { c } \text {Luther Corporation }\\ \text { Consolidated Balance Sheet }\\ \text { June 30, 2011 and 2012 (in \$ millions)}\\\hline\begin{array} { l } \text {Assets }&2012&2011&\begin{array} { l } \text {Liabilities and }\\ \text {Shareholders' Equity }\\\end{array}&2012&2011\\\hline\text { Current Assets } & &&{\text { Current Liabilities }} \\\hline \text { Cash } & 63.6 & 58.5 & \text { Accounts payable } & 87.6&73 .5\\\hline \text { Accounts receivable }&55.5&39.6&\begin{array} { l } \text {Notes payable / }\\ \text { short-term debt}\\\end{array}&10.5&9 .6\\\hline \text { Inventories }&45.9&42.9&\begin{array} { l } \text {Current maturities of }\\ \text { long-term debt}\\\end{array}&39.9&36.9\\\hline \text { Other current assets } & 6.0 & 3.0 & \text { Other current liabilities } & 6.01&2 .0 \\\hline \text { Total current assets } & 171.0 & 144.0 & \text { Total current liabilities } & 144.0&132 .0 \\\hline\\\hline\text { Long-Term Assets } &&& \text { Long-Term Liabilities }\\\hline \text { Land } & 66.6 & 62.1 & \text { Long-term debt } & 239.7&168 .9 \\\hline \text { Buildings } & 109.5 & 91.5 & \text { Capital lease obligations } & -----& ----- \\\hline \text { Equipment } & 119.1 & 99.6 & \text { Total Debt } & 239.7&168 .9 \\\hline\begin{array} { l } \text { Less accumulated}\\ \text { depreciation }\\\end{array}&(56.1) & (52.5) & \text { Deferred taxes } & 22.8&22 .2\\\hline\begin{array} { l } \text { Net property, plant, and}\\ \text { equipment}\\\end{array}&239.1 & 200.7 &\text { Other long-term liabilities }&---&---\\\hline \text { Goodwill } & 60.0 & -- & \text { Total long-term liabilities } & 262.5&191 .1 \\\hline \text { Other long-term assets } & 63.0 & 42.0 & \text { Total liabilities } & 406.5&323 .1 \\\hline \text { Total long-term assets } & 362.1 & 242.7 & \text { Shareholders' Equity } & 126.6&63 .6 \\\hline\\\hline\text { Total Assets }&533.1 & 386.7&\begin{array} { l } \text {Total liabilities and }\\ \text { Shareholders' Equity}\\\end{array}&533.1&386.7\\\end{array}\end{array}$


-Refer to the balance sheet above. Luther's quick ratio for 2011 is closest to:

A) 1.09
B) 1.31
C) 0.92
D) 0.77

Question 15

Use the table for the question(s) below.
$\begin{array} { l } \text { Balance Sheet }\\\begin{array} { l } \text { Assets}& \text { Liabilities}\\\begin{array}{l}\text { Current Assets }\\\hline\text { Cash } & 50 \\\text { Accounts receivable } & 22 \\\text { Inventories } & 17 \\\text { Total current assets } & 89\\\end{array}&\begin{array}{l}\text { Current Liabilities }\\\hline\text { Accounts payable } & 42 \\\text { Notes pavable/short-term debt } & 7\\\\\text { Total current liabilities }&49\\\end{array}\\\\\begin{array}{ll}\text {Long-Term Assets }\\\hline\text {Net property, plant, }\\\text { and equipment } & 121 \\ \text { Total long-term assets } & 121\\\\\\\text { Total Assets }&210\\\\\end{array}&\begin{array}{ll}\text { Long-Term Liabilities }\\\hline\\\text { Long-term debt } & 128 \\\text { Total long-term liabilities } & 128 \\\text { Total Liabilities } & \mathbf{1 7 7} \\\text { Shareholders' Equity } & 33 \\\text { Total Liabilities and } & 210 \\\text { Shareholders' Equity } &\end{array}\end{array}\end{array}$


-The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has 4 million shares outstanding, and these shares are trading at a price of $8.24 per share, what does this tell you about how investors view this firm's book value?

A) Investors consider that the firm's market value is worth more than its book value.
B) Investors consider that the firm's market value is worth less than its book value.
C) Investors consider that the firm's market value and its book value are roughly equivalent.
D) Investors consider that the firm's market value is worth very much less than its book value.

Question 16

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)?

A) 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
B) 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
C) that some senior members of the management team have retired in this financial year
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 17

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company are most likely to be true?

A) Since net working capital is high, the company will likely have little difficulty meeting its obligations.
B) Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.
C) Since net working capital is negative, the company will not have enough funds to meet its obligations.
D) Since net working capital is very high, the company will have ample money to invest after it meets its obligations.

Question 18

Use the table for the question(s) below.
$\begin{array} { c } \text { Luther Corporation }\\ \text { Consolidated Income Statement }\\ \text { Year ended June 30 (in \$ millions)}\\\begin{array} { lll }&2012&2011\\\hline \text { Total sales } & 610.1 & 578.3 \\\hline \text { Cost of sales } & (500.2) & (481.9) \\\hline \text { Gross profit } & 109.9 & 96.4 \\\hline \text { Selling, general, and } & \\\text { administrative expenses } & (40.5) & (39.0) \\\hline \text { Research and development } & (24.6) & (22.8) \\\hline \text { Depreciation and amortisation } & (3.6) & (3.3) \\\hline \text { Operating income } & 41.2 & 31.3 \\\hline \text { Other income } & --- & -- \\\hline \text { Earnings before interest and taxes (EBIT) } & 41.2 & 31.3 \\\hline \text { Interest income (expense) } & (25.1) & (15.8) \\\hline \text { Pretax income } & 16.1 & 15.5 \\\hline \text { Taxes } & (5.5) & (5.3) \\\hline \text { Net income } & 10.6 & 10.2 \\\hline\\\hline \text { Price per share } & \$ 16 & \$ 15 \\\hline \text { Shares outstanding (millions) } & 10.2 & 8.0 \\\hline \text { Share options outstanding (millions) } & 0.3 & 0.2 \\\hline\\\hline \text { Shareholders' Equity } & 126.6 & 63.6 \\\hline \text { Total Liabilities and Shareholders' Equity } & 533.1 & 386.7 \\\hline\end{array}\end{array}$


-Refer to the income statement above. For the year ending 30 June 2012, Luther's earnings per share are closest to:

A) $1.58
B) $4.04
C) $1.01
D) $1.04

Question 19

Allen Company bought a new copy machine to be depreciated straight line for three years. Where would this purchase be reflected on the Statement of Cash Flows?

A) It would be an addition to property, plant and equipment, so it would be an investing activity.
B) It would be an expense on the income statement, so it would be reflected in operating cash flows.
C) It would be an addition to cash, so would be reflected in the change in cash.
D) None of the above answers is correct.

Question 20

Which of the following statements regarding the income statement is INCORRECT?

A) The last or "bottom" line of the income statement shows the firm's net income.
B) The income statement shows the flow of earnings and expenses generated by the firm between two dates.
C) The income statement shows the earnings and expenses at a given point in time.
D) The first line of an income statement lists the revenues from the sales of products or services.

Question 21

Use the table for the question(s) below.
$\text { AOS Industries Statement of Cash Flows for } 2012$
$\begin{array}{l}\text { Operating activities }\\\text { Net Income } & 3.2 \\\text { Depreciation and amortisation } & 1.4 \\\text { Cash effect of changes in } & \\\text { Accounts receivable } & 2.1 \\\text { Accounts payable } & 1.1 \\\text { Inventory } & 0.8 \\\text { Cash from operating activities } & 2.8 \\\hline\\\text { Investment activities }\\\text { Capital expenditures } & 2.2 \\\text { Acquisitions and other investing activity } & -0.4 \\\text { h from investing activities } & 2.6\\\hline\\\text { Financing activities }\\\text { Dividends paid } & -1.5 \\\text { Sale or purchase of stock } & 2.1 \\\text { Increase in short-term borrowing } & 1.4 \\\text { Increase in long-term borrowing } & 3.2 \\\text { Cash from financing activities } & 5.2 \\\hline \text { Change in Cash and Cash Equivalents } & \mathbf{5 . 4}\end{array}$

-Consider the above statement of cash flows. What were AOS Industries' major means of raising money in 2012?

A) by sale of stock
B) from its operations
C) by issuing debt
D) from investment activities

Question 22

Use the table for the question(s) below
$\begin{array} { l } \text { Balance Sheet }\\\begin{array} { l } \text { Assets}& \text { Liabilities}\\\begin{array}{l}\text { Current Assets }\\\hline\text { Cash } & 50 \\\text { Accounts receivable } & 22 \\\text { Inventories } & 17 \\\text { Total current assets } & 89\\\end{array}&\begin{array}{l}\text { Current Liabilities }\\\hline\text { Accounts payable } & 42 \\\text { Notes pavable/short-term debt } & 7\\\\\text { Total current liabilities }&49\\\end{array}\\\\\begin{array}{ll}\text {Long-Term Assets }\\\hline\text {Net property, plant, }\\\text { and equipment } & 121 \\ \text { Total long-term assets } & 121\\\\\\\text { Total Assets }&210\\\\\end{array}&\begin{array}{ll}\text { Long-Term Liabilities }\\\hline\\\text { Long-term debt } & 128 \\\text { Total long-term liabilities } & 128 \\\text { Total Liabilities } & \mathbf{1 7 7} \\\text { Shareholders' Equity } & 33 \\\text { Total Liabilities and } & 210 \\\text { Shareholders' Equity } &\end{array}\end{array}\end{array}$


-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) $7 million
B) $33 million
C) $32 million
D) $40 million

Question 23

Use the table for the question(s) below.
$\begin{array}{l}\text { Income Statement for Xenon Manufacturing: }\\\begin{array} { l r r } & 2011 & 2012 \\\text { Total sales } & 202 & 212 \\\text { Cost of sales } & - 148 & - 172 \\\hline \text { Gross Profit } & 54 & 40 \\\text { Selling, general, } & & \\\text { and administrative expenses } & - 22 & - 20 \\\text { Research and development } & - 8 & - 7 \\\text { Depreciation and amortisation } & - 4 & - 3 \\\text { Other income } & 4 & 6 \\\hline \text { Earnings before interest } & & \\\text { and taxes (EBIT) } & 24 & 16 \\\text { Interest income (expense) } & - 7 & - 4 \\\hline \text { Pretax income } & 14 & 12 \\\text { Taxes } & - 4 & - 3 \\\hline \text { Net Income } & 10 & 9\end{array}\end{array}$

-Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2011 and 2012. What does the change in the operating margin between these two years imply about the company?

A) The efficiency of Xenon Manufacturing has significantly fallen between 2011 and 2012.
B) The efficiency of Xenon Manufacturing has significantly risen between 2011 and 2012.
C) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2011 and 2012.
D) The leverage of Xenon Manufacturing fell slightly between 2011 and 2012.

Question 24

Use the table for the question(s) below.
$\begin{array} { l } \text {Balance Sheet }\\\begin{array}{lll}\text { Assets } & \text { 2011 } & 2012 \\\text { Current Assets } & & \\\hline\text { Cash } & 50 & 46 \\\text { Accounts receivable } & 22 & 12 \\\text { Inventories } & 17 & 38 \\\text { Total current assets } & 89 & 96\end{array}&\begin{array}{lll}\text { Liabilities } & 2011 & 2012 \\\text { Current Liabilities } & & \\\hline \text { Accounts payable } & 42 & 48 \\\text { Notes payable/short-term debt } & 7 & 5 \\\\\text { Total current liabilities } & 49 & 53\\\end{array}\\\\\begin{array}{lll} \text { Long-Term Assets}\\\hline \text { Net property, plant,}\\\text { and equipment } & 121 & 116 \\ \text { Total long-term assets } & 121 & 116\\\\\\\text { Total Assets}&210&212\\\end{array}&\begin{array}{l}\text { Long-Term Liabilities }\\\hline\text { Long-term debt } & 128 & 136 \\\text { Total long-term liabilities } & 128 & 136 \\\text { Total Liabilities } & \mathbf{1 7 7} & 189 \\\text { Shareholders' Equity } & 33 & 23 \\\text { Total Liabilities and } & 210 & 212 \\\text { Shareholders' Equity } & &\end{array}\end{array}$


-
If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2011 and 2012?

A) The company has experienced a significant rise in its market value.
B) The company has added a major new asset in terms of plant and equipment.
C) The company has reduced its debt.
D) The company is having difficulties selling its product.

Question 25

Use the table for the question(s) below.
$\begin{array} { l } \text { Balance Sheet }\\\begin{array} { l } \text { Assets}& \text { Liabilities}\\\begin{array}{l}\text { Current Assets }\\\hline\text { Cash } & 50 \\\text { Accounts receivable } & 22 \\\text { Inventories } & 17 \\\text { Total current assets } & 89\\\end{array}&\begin{array}{l}\text { Current Liabilities }\\\hline\text { Accounts payable } & 42 \\\text { Notes pavable/short-term debt } & 7\\\\\text { Total current liabilities }&49\\\end{array}\\\\\begin{array}{ll}\text {Long-Term Assets }\\\hline\text {Net property, plant, }\\\text { and equipment } & 121 \\ \text { Total long-term assets } & 121\\\\\\\text { Total Assets }&210\\\\\end{array}&\begin{array}{ll}\text { Long-Term Liabilities }\\\hline\\\text { Long-term debt } & 128 \\\text { Total long-term liabilities } & 128 \\\text { Total Liabilities } & \mathbf{1 7 7} \\\text { Shareholders' Equity } & 33 \\\text { Total Liabilities and } & 210 \\\text { Shareholders' Equity } &\end{array}\end{array}\end{array}$


-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?

A) Long-Term Liabilities would rise to $182 million, and Total Liabilities and Shareholders' Equity would be adjusted accordingly.
B) Net property, plant, and equipment would rise to $126 million, and Total Assets and Shareholders' Equity would be adjusted accordingly.
C) Net property, plant, and equipment would fall to $116 million, and Total Assets and Shareholders' Equity would be adjusted accordingly.
D) Long-Term Liabilities would fall to $172 million, and Total Liabilities and Shareholders' Equity would be adjusted accordingly.

Question 26

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

A) as an outflow under Financial Activities
B) as an outflow under Operating Activities
C) as an outflow under Investment Activities
D) The acquisition would not be recorded on the statement of cash flows.

Question 27

Use the table for the question(s) below.
$\text { AOS Industries Statement of Cash Flows for } 2012$
$\begin{array}{l}\text { Operating activities }\\\text { Net Income } & 3.2 \\\text { Depreciation and amortisation } & 1.4 \\\text { Cash effect of changes in } & \\\text { Accounts receivable } & 2.1 \\\text { Accounts payable } & 1.1 \\\text { Inventory } & 0.8 \\\text { Cash from operating activities } & 2.8 \\\hline\\\text { Investment activities }\\\text { Capital expenditures } & 2.2 \\\text { Acquisitions and other investing activity } & -0.4 \\\text { h from investing activities } & 2.6\\\hline\\\text { Financing activities }\\\text { Dividends paid } & -1.5 \\\text { Sale or purchase of stock } & 2.1 \\\text { Increase in short-term borrowing } & 1.4 \\\text { Increase in long-term borrowing } & 3.2 \\\text { Cash from financing activities } & 5.2 \\\hline \text { Change in Cash and Cash Equivalents } & \mathbf{5 . 4}\end{array}$

-Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industries' retained earnings for 2012?

A) $1.7 million
B) $2.1 million
C) $5.4 million
D) $1.3 million

Question 28

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

Question 29

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?

A) prepaid rent on the offices occupied by the company
B) the depreciation over the last year in the value of the vehicles owned by the company
C) a loan which must be paid back in two years' time
D) revenue received for the delivery of items that have not yet been delivered

Question 30

Use the table for the question(s) below.
$\text { AOS Industries Statement of Cash Flows for } 2012$
$\begin{array}{l}\text { Operating activities }\\\text { Net Income } & 3.2 \\\text { Depreciation and amortisation } & 1.4 \\\text { Cash effect of changes in } & \\\text { Accounts receivable } & 2.1 \\\text { Accounts payable } & 1.1 \\\text { Inventory } & 0.8 \\\text { Cash from operating activities } & 2.8 \\\hline\\\text { Investment activities }\\\text { Capital expenditures } & 2.2 \\\text { Acquisitions and other investing activity } & -0.4 \\\text { h from investing activities } & 2.6\\\hline\\\text { Financing activities }\\\text { Dividends paid } & -1.5 \\\text { Sale or purchase of stock } & 2.1 \\\text { Increase in short-term borrowing } & 1.4 \\\text { Increase in long-term borrowing } & 3.2 \\\text { Cash from financing activities } & 5.2 \\\hline \text { Change in Cash and Cash Equivalents } & \mathbf{5 . 4}\end{array}$

-Consider the above statement of cash flows. In 2012, AOS Industries had contemplated buying a new warehouse for $2 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 2012?

A) It would have $1,950,000 less cash at the end of 2012.
B) It would have $150,000 less cash at the end of 2012.
C) It would have an additional $50,000 in cash at the end of 2012.
D) It would have $2,000,000 less cash at the end of 2012.

Question 31

Use the table for the question(s) below
$\begin{array}{l}\text { Income Statement for Xenon Manufacturing: }\\\begin{array} { l r r } & 2011 & 2012 \\\text { Total sales } & 202 & 212 \\\text { Cost of sales } & - 148 & - 172 \\\hline \text { Gross Profit } & 54 & 40 \\\text { Selling, general, } & & \\\text { and administrative expenses } & - 22 & - 20 \\\text { Research and development } & - 8 & - 7 \\\text { Depreciation and amortisation } & - 4 & - 3 \\\text { Other income } & 4 & 6 \\\hline \text { Earnings before interest } & & \\\text { and taxes (EBIT) } & 24 & 16 \\\text { Interest income (expense) } & - 7 & - 4 \\\hline \text { Pretax income } & 14 & 12 \\\text { Taxes } & - 4 & - 3 \\\hline \text { Net Income } & 10 & 9\end{array}\end{array}$

-Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the gross margin for 2011 and 2012. What does the change in the gross margin between these two years imply about the company?

A) The efficiency of Xenon Manufacturing has significantly risen between 2011 and 2012.
B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2011 and 2012.
C) The leverage of Xenon Manufacturing fell slightly between 2011 and 2012.
D) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2011 and 2012.

Question 32

Which of the following is a way that the Operating Activity section of the statement of cash flows adjusts Net Income from the balance sheet?

A) It adds the cash that flows from investors to the firm.
B) It subtracts all expenses and costs related to the firm's operating activities.
C) It adds all non-cash entries related to the firm's operating activities.
D) It removes the cash used for investment purposes.

Question 33

Manufacturer A has a profit margin of 2.0%, an asset turnover of 1.7 and an equity multiplier of 4.9. Manufacturer B has a profit margin of 2.3%, an asset turnover of 1.1 and an equity multiplier of 4.7. How much asset turnover should manufacturer B have to match manufacturer A's ROE?

A) 1.54%
B) 4.77%
C) 3.00%
D) 3.09%

Question 34

Use the table for the question(s) below.
$\begin{array} { c } \text { Luther Corporation }\\ \text { Consolidated Income Statement }\\ \text { Year ended June 30 (in \$ millions)}\\\begin{array} { lll }&2012&2011\\\hline \text { Total sales } & 610.1 & 578.3 \\\hline \text { Cost of sales } & (500.2) & (481.9) \\\hline \text { Gross profit } & 109.9 & 96.4 \\\hline \text { Selling, general, and } & \\\text { administrative expenses } & (40.5) & (39.0) \\\hline \text { Research and development } & (24.6) & (22.8) \\\hline \text { Depreciation and amortisation } & (3.6) & (3.3) \\\hline \text { Operating income } & 41.2 & 31.3 \\\hline \text { Other income } & --- & -- \\\hline \text { Earnings before interest and taxes (EBIT) } & 41.2 & 31.3 \\\hline \text { Interest income (expense) } & (25.1) & (15.8) \\\hline \text { Pretax income } & 16.1 & 15.5 \\\hline \text { Taxes } & (5.5) & (5.3) \\\hline \text { Net income } & 10.6 & 10.2 \\\hline\\\hline \text { Price per share } & \$ 16 & \$ 15 \\\hline \text { Shares outstanding (millions) } & 10.2 & 8.0 \\\hline \text { Share options outstanding (millions) } & 0.3 & 0.2 \\\hline\\\hline \text { Shareholders' Equity } & 126.6 & 63.6 \\\hline \text { Total Liabilities and Shareholders' Equity } & 533.1 & 386.7 \\\hline\end{array}\end{array}$


-Refer to the income statement above. Assuming that Luther has no convertible bonds outstanding, then for the year ending 30 June 2012, Luther's diluted earnings per share are closest to:

A) $1.53
B) $1.04
C) $1.01
D) $3.92

Question 35

Use the table for the question(s) below.
$\begin{array} { c } \text { Luther Corporation}\\ \text { Consolidated Balance Sheet }\\ \text {June 30, 2011 and 2012 (in \$ millions) }\\\begin{array} { l }\hline \text { Assets } & 2012 & 2011 & \begin{array}{l}\text { Liabilities and } \\\text { Shareholders' Equity }\end{array} &2012&2011\\\hline \text { Current Assets } & & & \text { Current Liabilities } & \\\hline \text { Cash } & 63.6 & 58.5 & \text { Accounts payable } & 87.6&73 .5 \\\hline \text { Accounts receivable } & 55.5 & 39.6 & \begin{array}{l}\text { Notes payable / } \\\text { short-term debt }\end{array} & 10.5&9 .6\\\hline \text { Inventories } & 45.9 & 42.9 & \begin{array}{l}\text { Current maturities of } \\\text { long-term debt }\end{array} & 39.9&36 .9 \\\hline \text { Other current assets } & 6.0 & 3.0 & \text { Other current liabilities } & 6.0&12 .0\\\hline\\\hline \text { Long-Term Assets } & &&{\text { Long-Term Liabilities }} \\\hline \text { Land } & 66.6 & 62.1 & \text { Long-term debt } & 239.7&168 .9 \\\hline \text { Buildings } & 109.5 & 91.5 & \text { Capital lease obligations } & \ldots&\ldots\\\hline \text { Equipment } & 119.1 & 99.6 & \text { Total Debt } & 239.7&168 .9 \\\hline\begin{array} { l } \text { Less accumulated}\\ \text { depreciation }\\\end{array}&(56.1) & (52.5) & \text { Deferred taxes } & 22.8&22 .2 \\\hline \begin{array}{l}\text { Net property, plant, and } \\\text { equipment }\end{array} & 239.1 & 200.7 & \text { Other long-term liabilities } & ---&---\\\hline \text { Goodwill } & 60.0 & -- & \text { Total long-term liabilities } & 262.5&191 .1 \\\hline \text { Other long-term assets } & 63.0 & 42.0 & \text { Total liabilities } & 406.5&323 .1 \\\hline \text { Total long-term assets } & 362.1 & 242.7 & \text { Shareholders' Equity } & 126.6&63 .6 \\\hline\\\hline\text { Total Assets } & 533.1 & 386.7&\begin{array} { l } \text {Total liabilities and }\\ \text { Shareholders' Equity }\\\end{array}&533.1&386 .7 \\\hline\end{array}\end{array}$


-Refer to the balance sheet above. If in 2012 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 2011 is closest to:

A) 2.35
B) 1.78
C) 1.71
D) 2.31

Question 36

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while promising 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?

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) The cash raised should have been recorded as short-term loans.

Question 37

Which of the following is the main lesson that analysts and investors should take from the cases of Enron and HIH?

A) The information in financial statements should be viewed extremely critically.
B) It is not possible to effectively evaluate a company unless all the financial statements are fully and correctly prepared.
C) Readers of even fraudulent financial statements can spot signs of a firm's financial health if those statements are read fully and with care.
D) The usefulness of financial statements to investors is entirely dependent on the ethics of those constructing them.

Question 38

Which of the following is NOT one of the financial statements that must be produced by a public company?

A) the statement of activities
B) the statement of cash flows
C) the income statement
D) the balance sheet

Question 39

Company A has current assets of $42 billion and current liabilities of $31 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?

A) Company A and Company B have roughly equivalent enterprise values.
B) Company A has greater leverage than Company B.
C) Company A has less leverage than Company B.
D) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.

Question 40

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

Question 41

The firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

Question 42

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

Question 43

Use the table for the question(s) below.

Refer to the balance sheet above. If on 30 June 2011 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's enterprise value?

Question 44

Shareholders' equity is the difference between a firm's assets and liabilities, as shown on the balance sheet.

Question 45

International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that Australia will report according to IFRS before the second half of the twenty-first century.

Question 46

What is the role of an auditor in financial statement analysis?

Question 47

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

Question 48

Financial statements are accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firm's assets and the financing of those assets, and a prediction of the firm's future performance.

Question 49

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

Question 50

Use the table for the question(s) below.

Refer to the balance sheet above. If on 30 June 2011 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's market-to-book ratio?

Question 51

The managements of public companies are not legally required to disclose any off balance sheet transactions.

Question 52

Use of the A-IFRS and auditors has eliminated the danger of inadvertent or deliberate fraud in financial statements.