Deck 5: Financial Reporting and Analysis

Question 1

An audit report expressing an unqualified opinion is generally desired by the company presenting its financial statements.

Answer 1

True

Question 2

A "hold" rating on a stock is an analyst's position that you should buy and accumulat e shares of this company.

Answer 2

False

Question 3

External audits are conducted by Certified Public Accountants (CPAs) who are not independent of the company.

Answer 3

False

Question 4

The Sarbanes-Oxley Act requires that an internal control report be included in the company's annual report.

Question 5

Stock price data can be included in the annual report.

Question 6

The primary purpose of external financial reporting is to release information that is useful to directors

Question 7

Multi-step income statements display subtotals which provide important measures of profit in addition to net income.

Question 8

A net profit margin ratio of 0.2 means that $1 of profit is generated for every $5 of sales revenue

Question 9

The Sarbanes-Oxley Act requires external auditors to report on the company's internal controls over financial reporting.

Question 10

The International Accounting Standards Board (IASB) is the international counterpart to the FASB in the
United States.

Question 11

The purpose of the Sarbanes-Oxley Act is to require all companies to prepare financial statements.

Question 12

Condensed financial statements in the quarterly reports are usually audited to ensure that GAAP were followed.

Question 13

The order in which assets are reported on the balance sheet under IFRS is the same as the order under the
U.S. GAAP rules.

Question 14

The asset turnover ratio is directly affected by operating and financing decisions.

Question 15

An asset turnover ratio of 0.4 means that $4 in net income is generated for every $10 in assets

Question 16

The income statement provides all the data needed to calculate the basic financial statement ratios

Question 17

The SEC requires public companies to electronically file certain reports with the SEC in order to ensure sufficient, relevant information is available to investors.

Question 18

The fraud triangle is a term used by fraud investigators to identify the requirements for a fraud to occur.

Question 19

Form 10-Q is a quarterly report electronically filed with the SEC.

Question 20

Stockholders elect the directors who then oversee the performance of management.

Question 21

Which of the following statements regarding the asset turnover ratio is true?

A) The asset turnover ratio compares the amount of sales revenue for the period to the book value of assets at the end of the period.
B) An asset turnover ratio must be less than 1.
C) The higher the ratio, the less efficiently the company is using its assets
D) This ratio is not expressed as a percentage.

Question 22

As of the year 2009, the U.S. had not switched to IFRS.

Question 23

Under IFRS, the income statement is called the Statement of Comprehensive Income.

Question 24

Accounting information serves a contracting function when it is used by:

A) creditors to manage financial agreements.
B) government officials to regulate the business and its financial records.
C) analysts to assess business risks.
D) investors to vote on company policies.

Question 25

Which of the following statements regarding analysis of ratios is true?

A) A time-series analysis compares a company's financial results for one period to its own results in other periods.
B) If we compare a company's performance in the current period to its competitors' performance, we are conducting a time-series analysis.
C) Benchmarks are judges' seats.
D) Cross-sectional analysis refers to a ratio comparison across companies that are in different industries.

Question 26

The asset turnover ratio and the net profit margin ratio can both be used to evaluate the solvency of a company.

Question 27

Which of the following is correct?

A) Management is under constant pressure from directors to produce pleasing financial results whatever it takes.
B) Directors oversee the managers of the company and have the primary goal of ensuring that financial decisions benefit the management.
C) Managers oversee the members of the Board of Directors.
D) The stockholders elect the members of the board of directors.

Question 28

Which of the following statements regarding the roles of accounting information is not true?

A) When creditors use accounting information to administer contracts, it serves a contracting role.
B) When accounting data are used to assess the worth of a company or its stock, they are said to be used in a valuation role.
C) When accounting information is used in managing the business, it is being used in a management function
D) When directors use financial information, it is being used to evaluate financial decisions to ensure that they

Question 29

Accounting information serves a management function when it is used by:

A) executives to make a business decision.
B) government officials to regulate the business and its financial records.
C) labor unions to negotiate contracts with the business.
D) investors to vote on company policies.

Question 30

The opportunity to commit fraud exists if there are weaknesses in the accounting system that involves analyzing, recording and summarizing the results of business activities.

Question 31

The Sarbanes-Oxley Act (SOX) requires the company's board of directors to establish an audit committee of independent directors to oversee the financial matters of the company.

Question 32

Accounting information serves a valuation function when it is used by:

A) managers to evaluate net income and taxes.
B) directors to evaluate net income and taxes.
C) government officials to evaluate net income and taxes.
D) investors to estimate the value of the business

Question 33

Under IFRS, the balance sheet is called the Statement of Financial Position.

Question 34

The Sarbanes-Oxley Act (SOX) grants legal protection to 'whistle-blowers.'

Question 35

How many of the following statements regarding distribution of financial information are true?
A company does not issue a press release containing financial data until the data have been checked by management.
Company filings with the SEC, such as Forms 10-K and 10-Q, are available to the public.
SEC filings are available to the public after they are received by the SEC's EDGAR service.

A) None
B) One
C) Two
D) Three

Question 36

Companies may adopt a Code of Ethics for some of their financial officers, but this is not required by the
Sarbanes-Oxley Act (SOX).

Question 37

The incentive element of the fraud triangle includes reasons why top management may commit fraud such as enhancing job security and obtaining bigger paychecks.

Question 38

Which of the following statements regarding ratios is true?

A) All other things equal, a lower debt-to-assets ratio indicates a riskier financing strategy.
B) A lower asset turnover ratio is a positive indicator of the efficiency of a company.
C) The net profit margin ratio cannot be used to indicate how well a company is controlling its expenses.
D) Ratios can be useful in the attempt to measure key relationships within a business.

Question 39

Accounting information serves a governance function when it is used by:

A) managers to make a business decision.
B) government officials to regulate the business and its financial records.
C) directors to oversee the business.
D) analysts to vote on company policies.

Question 40

An analyst notes that the net income of a major corporation grew 10% last year and that it is currently growing at 11%. The analyst concludes that the net income will rise 12% next year. This is an example of a(n):

A) audit.
B) earnings forecast.
C) credit analysis.
D) business model.

Question 41

When calculating a ratio that uses period data and point-in-time data, analysts typically use the :

A) average value for the period data.
B) starting point for the point-in-time data.
C) ending point for the period data.
D) average value for the point-in-time data.

Question 42

The group that uses accounting information to evaluate companies' past performance, predict future results, and make recommendations about the companies to current and potential investors is known as:

A) analysts.
B) managers.
C) creditors.
D) auditors.

Question 43

Which of the following measures is most useful in analyzing a company's ability to control expenses?

A) Debt-to-assets ratio.
B) Asset turnover ratio.
C) Net profit margin ratio.
D) Pro forma ratio.

Question 44

On January 1, 2011, a company has assets of $16 billion and stockholders' equity of $8 billion. On January 1, 2012, the same company has assets of $20 billion and stockholders' equity of $9 billion. During 2011, the
Company had total sales revenue of $9 billion and total expenses of $7 billion. The company's debt -to-assets ratio on January 1, 2012 is:

A) 0.55
B) 0.45
C) 0.035
D) 0.01

Question 45

When auditors conclude that a company's financial statements conform to GAAP, the audit report is said to be:

A) validated.
B) qualified.
C) relevant.
D) unqualified.

Question 46

On January 1, 2011, a company has assets of $16 billion and stockholders' equity of $8 billion. On January 1, 2009, the same company has assets of $20 billion and stockholders' equity of $9 billion. During 2011, the company had total sales revenue of $9 billion and total expenses of $7 billion. The company's asset turnover ratio for 2011 is:

A) 2.5
B) 0.5
C) 0.45
D) 0.1

Question 47

A company increases sales revenue. Total assets and net income are unchanged. The company's net profit margin ratio:

A) and asset turnover ratio both rise.
B) rises and its asset turnover ratio falls.
C) and asset turnover ratio both fall.
D) falls and its asset turnover ratio rises.

Question 48

The basic business model shows:

A) financing is used to generate revenue that is invested in assets that produce net income.
B) financing is used to invest in assets that generate revenues that produce net income.
C) revenue is produced from net income that is invested in assets to repay financing.
D) assets are used to generate financing that produces revenue and net income.

Question 49

A company has an asset turnover ratio of 1.15. Which of the following statements is true?

A) The company generates $1.15 of net income for every $1 in reported assets.
B) The company buys assets more frequently than it sells them.
C) The company generates $1.15 of sales revenue for every $1 in reported assets.
D) This is an improvement over the previous period when the asset turnover rate was 1.7.

Question 50

If we were to compare the financial statements of Microsoft Corporation for 2000, 20005 and 2010, this would be:

A) an external audit.
B) a cross-sectional analysis.
C) a business model
D) a time-series analysis.

Question 51

All other things equal, in which of the following cases would an analyst rank the company most favorably?

A) The company has the highest debt-to-assets ratio in the industry as well as the highest profit margin ratio and asset turnover ratio.
B) The company has the highest debt-to-assets ratio in the industry as well as the highest profit margin ratio while its asset turnover ratio is the lowest.
C) The company has the lowest debt-to-assets ratio in the industry as well as the lowest asset turnover ratio while its profit margin ratio is the highest.
D) The company has the lowest debt-to-assets ratio in the industry as well as the highest profit margin ratio and asset turnover ratio.

Question 52

The Grass is Greener Company borrows money from a bank. Part of the loan agreement requires Grass is Greener to maintain stockholders' equity of at least 40% of assets or pay a higher interest rate. This requirement is referred to as a:

A) loan covenant.
B) credit rating.
C) bond rating.
D) call feature.

Question 53

If a company declares and pays a dividend during the year, this will:

A) decrease the company's net profit margin.
B) increase the company's debt-to-assets ratio.
C) decrease the company's debt-to-assets ratio.
D) increase the company's net profit margin.

Question 54

Refer to the summary financial information for Momentum Clothing Distributors. Which of the following statements is true?

A) The company's level of financing risk was greater in 2011 than it was in 2010.
B) In comparison to 2010, the company became less efficient in 2011 in generating revenues from its investment in assets.
C) Despite the increase in sales in 2011, the company controlled its expenses just as well as it had in 2009.
D) The company's level of financing risk was less in 2010 than it was in 2009.

Question 55

Which of the following statements is true?

A) The debt-to-assets ratio requires only information found on the balance sheet.
B) The net profit margin ratio requires only information found on the balance sheet.
C) The asset turnover ratio requires only information found on the income statement.
D) The debt-to-assets ratio and the asset turnover ratio are used to evaluate profitability of the company.

Question 56

If a company negotiates a deal with creditors to exchange debt for stock, its:

A) net profit margin ratio will increase.
B) asset turnover ratio will increase.
C) debt-to-assets ratio will decrease.
D) debt-to-assets ratio will remain unchanged.

Question 57

Purrfect Pets has a debt-to-assets ratio of 0.55. This means that:

A) stockholders' equity is 55% of total assets.
B) stockholders' equity is 45% of total assets.
C) the asset turnover ratio also is 0.55.
D) the asset turnover ratio also is 0.45.

Question 58

On March 15, MVX Corporation announced that it had changed its fiscal year-end from June 30 to May 31. As a result of this change, the corporation's current fiscal year is comprised of an eleven-month period. The corporation issued a press release that stated "management believes the May 31 year-end is shared by more of its peers in the industry, allowing for more meaningful analysis and comparisons within the sector." To which of the four characteristics of useful information is management referring?

A) Relevance.
B) Reliability.
C) Consistency.
D) Comparability.

Question 59

On January 1, 2011, a company has assets of $16 billion and stockholders' equity of $8 billion. On January 1, 2009, the same company has assets of $20 billion and stockholders' equity of $9 billion. During 2011, the
Company had total sales revenue of $9 billion and total expenses of $7 billion. If the company doesn't have other sources of revenue, its net profit margin during 2011 is:

A) 0.01
B) 0.013
C) 0.22
D) 0.022

Question 60

Earnings forecasts:

A) estimate future revenue.
B) are calculated by taking net income and dividing by expenses.
C) estimate future net income.
D) are calculated by taking net income estimates and dividing by expense estimates.

Question 61

Important sources of publically available financial information about a company other than its financial statements do not include:

A) press releases.
B) company reports.
C) SEC filings.
D) management reports

Question 62

Which of the following accurately describes how the issuance of additional shares of stock for cash would affect the ratios indicated?

A) Option A
B) Option B
C) Option C
D) Option D

Question 63

One of the main reasons that companies release early summaries of financial statements in press releases is:

A) they do not have to conform to GAAP.
B) this allows them to delay the release of financial statements.
C) it makes information available to external users in a more timely manner.
D) they do not have to be related to the financial statements.

Question 64

Scandals involving Enron and WorldCom drew heightened attention to the possibility that financial statements might be misreported to portray a favorable impression of a company's financial results. Which of the following false impressions could be suggested by the ratio indicated?

A) Greater control of expenses might be suggested by the net profit margin ratio.
B) Greater efficiency in asset use might be suggested by the debt-to-assets ratio.
C) Greater control of expenses might be suggested by the debt-to-assets ratio.
D) Less financing risk might be suggested by the asset turnover ratio.

Question 65

Which of the following accurately describes how recording depreciation for an existing building would affect the ratios indicated?

A) Option A
B) Option B
C) Option C
D) Option D

Question 66

Which of the following accurately describes how declaring but not yet paying dividends would affect the ratios indicated?

A) Option A
B) Option B
C) Option C
D) Option D

Question 67

The asset turnover ratio measures:

A) the profit generated by efficient management of assets.
B) the level of financing risk assumed by the company.
C) the sales revenue generated by efficient management of assets.
D) the ability to earn profit for the stockholders.

Question 68

Fraud investigators identify the fraud triangle of three things that have to exist for accounting fraud to occur. Which of the following is not one of the three elements of the fraud triangle?

A) The incentive to commit fraud.
B) The opportunity to commit fraud.
C) The character to commit fraud.
D) The lack of a business Code of Ethics.

Question 69

At the end of last year, Cessa Company had total assets in the amount of $4,000,000 and total liabilities in the amount of $3,000,000. The company sold stock to new stockholders at the beginning of the current year for $1,000,000. As a direct result of this transaction, the:

A) debt-to-assets ratio will decrease.
B) asset turnover ratio will increase.
C) net profit margin ratio will increase.
D) net profit margin ratio will decrease.

Question 70

Which of the following accurately describes how the collection of cash on account from a customer would affect the ratios indicated?

A) Option A
B) Option B
C) Option C
D) Option D

Question 71

A company files a Form 10-K with the SEC to submit its:

A) quarterly report.
B) annual report.
C) press releases.
D) report of current events of financial importance.

Question 72

A company has assets of $10 million and liabilities of $7 million. Liabilities include $4 million in accounts payable, $2 million in long-term notes payable and $1 million in other non-current liabilities. If a financial web site uses long-term debt rather than total liabilities to calculate the company's debt-to-assets ratio, the web site will report a ratio of:

A) 0.5, which would correctly state financing risk.
B) 0.4, which would suggest more financing risk than it actually has.
C) 0.3, which would suggest less financing risk than it actually has.
D) 0.3, which would suggest more financing risk than it actually has.

Question 73

Which of the following accurately describes how accruing advertising expense incurred but not yet paid would affect the ratios indicated?

A) Option A
B) Option B
C) Option C
D) Option D

Question 74

The financial results for a public company are generally first reported in a:

A) press release issued one day after the accounting period ends.
B) press release issued on the same day as the quarterly or annual report.
C) quarterly or annual report issued a week or two after the accounting period ends.
D) press release issued a few weeks after the accounting period ends.

Question 75

Which of the following describes the order in which the financial reports or disclosures would normally be issued by public companies?

A) (1) annual report, (2) Form 10-K, (3) Press release announcing annual earnings.
B) (1) Form 10-K, (2) annual report, (3) Press release announcing annual earnings.
C) (1) Press release announcing annual earnings, (2) Form 10-K, (3) annual report.
D) (1) Press release announcing annual earnings, (2) annual report, (3) Form 10-K.

Question 76

Which of the following is not a SOX requirement?

A) SOX establishes a tip line for employees to report questionable acts.
B) SOX requires the external auditors to issue a report on the effectiveness of internal controls.
C) SOX increases the maximum fines for individuals who commit fraudulent acts.
D) SOX requires management to report on the effectiveness of internal controls and to make it clear that they are not responsible for the internal control system.

Question 77

Under current laws dealing with financial misrepresentation, which of the following statements is true?

A) Managers found guilty can escape paying fines if they declare bankruptcy.
B) Managers can be sentenced to long prison terms of up to 20 years per violation.
C) Managers found guilty may keep any bonuses or profits from the misrepresentation if their fines are less than such bonuses or profits.
D) All of the above.

Question 78

Which of the following sources of information is most likely to contain unreliable information?

A) An investor's web site.
B) A company's annual report.
C) A company's press release.
D) A report filed with the SEC.

Question 79

Form 8-K, which is filed with the SEC, is also known as a(n):

A) quarterly report.
B) annual report.
C) current events report.
D) audit report.

Question 80

Further information about financial data, accounting methods, and financial statements is included in what part of the annual report?

A) The balance sheet.
B) The unaudited condensed quarterly data.
C) The notes to the financial statements.
D) The summarized financial data.