Deck 12: Statement Cash Flows

Question 1

Accounting methods, estimates, and assumptions used in preparing financial statements are found

A) in the auditor's report.
B) in the management discussion and analysis.
C) In the notes to the ?nancial statements.
D) on the income statement.

Answer 1

In the notes to the ?nancial statements.

Question 2

In Canada, generally accepted accounting principles for private enterprises are currently developed by which entity?

A) The Securities and Exchange Commission
B) Ontario Securities Commission
C) The Private Company Accounting Oversight Board
D) The Accounting Standards Board

Answer 2

The Accounting Standards Board

Question 3

Information about material events, opportunities and uncertainties would best be found in

A) in the management discussion and analysis.
B) In the notes to the ?nancial statements.
C) on the income statement.
D) in the auditor's report.

Answer 3

in the management discussion and analysis.

Question 4

When are ratios most useful for analysis?

A) When used alone.
B) When compared with historical ratios of the same company.
C) When compared with ratios for other companies in the industry.
D) When compared with both historical ratios of the same company and ratios for other companies in the industry.

Question 5

Ratios are useful in explaining the:

A) differences between companies
B) relationships between financial data
C) trends within industries
D) reasons for financial performance

Question 6

Whether by implementing a strategy of differentiation or one of cost advantage, the common objective of a company is

A) an ROA above 8%
B) positive earnings per share
C) maximum return on equity
D) maximum leverage

Question 7

International ?nancial reporting standards are currently developed by which entity

A) the IFRS Foundation
B) the International Accounting Standards Board
C) the International Organization of Securities Commissions
D) the Ontario Securities Commission

Question 8

Which of the following is not an example of a company comparison analysis?

A) Determining how the growth in sales from one company differed from that of another company.
B) Comparing growth in sales across different industries
C) Comparing total sales across companies in the same industry for the past three years.
D) Determining the growth in sales for a company over a ?ve-year period.

Question 9

Companies that focus on maintaining high pro?t margins in order to generate higher returns on equity are most likely employing what type of business strategy?

A) Cost advantage
B) Vertical integration
C) Differentiation
D) Earnings capitalization

Question 10

Companies that focus on making the most e?cient use of assets in order to generate higher returns on equity are most likely employing what type of business strategy?

A) Cost advantage
B) Vertical integration
C) Differentiation
D) Earnings capitalization

Question 11

The primary responsibility for the information in a company's ?nancial statements and related disclosures lies with:

A) the creditors.
B) the external auditor.
C) the CEO and CFO of the company.
D) the internal auditors.

Question 12

Review of the ?nancial statements revealed the following for Petrolis Sales Inc. Sales $1,250,000, Net income $37,500, Total assets $650,000, Long-term debt $750,000, Interest expense $65,000 and Cost of goods sold $775,000. When preparing common size ?nancial statements interest expense would be shown as

A) 9.4%
B) 8.4%
C) 5.2%
D) 10%

Question 13

What type of audit report indicates that the ?nancial statements present fairly the ?nancial position, results of operations and the cash ?ows for the accounting period?

A) A disclaimer of opinion
B) A quali?ed report
C) An unquali?ed report
D) An adverse opinion

Question 14

Why is the audit report important in the analysis of a company?

A) The auditors are an independent third party expressing an opinion on the fairness of the ?nancial statements.
B) It guarantees the accuracy of the information in the ?nancial statements.
C) The auditors are hired by management to assess the appropriateness of the accounting policies chosen.
D) It guarantees the accuracy of the internal controls of the company.

Question 15

Time series analysis involves examining a company's ?nancial data

A) across account classi?cations.
B) and comparing it with other companies.
C) across time periods.
D) as percentages of net sales or total assets.

Question 16

What is the goal of the International Accounting Standards Board?

A) To have worldwide acceptance of a set of international generally accepted accounting principles
B) To develop accounting principles to meet the legal and tax needs of countries
C) To protect the right of each country to develop and maintain its own accounting standards
D) To develop rules for listing securities in any market

Question 17

Information about management and director compensation would best be found

A) in the notes to the ?nancial statements
B) in the auditor's report
C) In the cash ?ow statement
D) In the shareholders' information circular

Question 18

An analytical tool for comparing two companies of different sizes is

A) common size statements
B) short-term liquidity
C) ?nancial leverage
D) Annual reports

Question 19

Solvency is of most interest to:

A) short-term creditors.
B) customers.
C) competitors.
D) long-term creditors.

Question 20

What is the common denominator for each item on the income statement when preparing a common size income statement?

A) Net income
B) Sales
C) Operating pro?t
D) Gross pro?t

Question 21

Perot Company had profit before interest and taxes of $120,000. Interest expense for the period was $17,000 and income taxes amounted to $28,500. The average shareholders' equity was $680,000. What is Perot's return on equity?

A) 10.96%
B) 13.46%
C) 15.15%
D) 17.65%

Question 22

Compared to an identical company that uses an operating lease, a company that uses a finance lease will most likely produce a reported return on equity (ROE) that

A) starts lower but rises during the life of the lease
B) starts higher but declines during the life of the lease
C) is lower but does not change over the lease period.
D) starts higher and remains so during the life of the lease.

Question 23

On a common size income statement, all items are shown as:

A) percentages of net income.
B) percentages of gross revenue.
C) percentages of gross profit.
D) percentages of total assets.

Question 24

Which of the following actions would be considered as contributing to low quality of ?nancial reporting?

A) A pharmaceutical company maintains research and development expenses even in a depressed economy.
B) A company reveals that a major customer may ?le for bankruptcy.
C) A company uses an accelerated depreciation method for delivery vehicles
D) A beverage company reduces advertising expense in order to meet earnings forecast for the quarter.

Question 25

The records of Twain Company include the following: $$\begin{array} { | l | r | } \hline \text { Average total assets } & \$ 60,000 \\\hline \text { Average total liabilities } & 25,000 \\\hline \text { Total revenue } & 107,600 \\\hline \text { Total expense (including income tax) } & 104,000 \\\hline \text { Interest expense (included in total expenses) } & 2,000 \\\hline \text { Income tax rate 40\% } & \\\hline\end{array}$$ What is the financial leverage percentage (rounded to the nearest percent)?

A) 4%
B) 5%
C) 7%
D) 9%

Question 26

Beta Limited had a current ratio of 0.8:1 before borrowing $50,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Beta's current ratio?

A) The ratio remained unchanged.
B) The ratio decreased.
C) The ratio increased.
D) Cannot be determined.

Question 27

Net sales are $2,700,000, beginning total assets are $750,000, and the asset turnover is 3.0. What is the ending total asset balance?

A) $900,000.
B) $1,050,000.
C) $600,000.
D) $1,125,000.

Question 28

$\begin{array}{l}\text { Consider the following statement of earnings data for Mandrake Mills Inc. }\\\begin{array} { | l | r | r | } \hline & \mathbf { 2 0X7 } & \mathbf { 2 0 X 6 } \\\hline \text { Sales revenue } & \$ 97,300 & \$ 86,200 \\\hline \text { Less: Cost of goods sold } & \underline { 45,600 } & \underline { 53,400 } \\\hline \text { Gross profit } & 51,700 & 32,800 \\\hline \text { Selling and administration expense } & \underline { 22,500 } & \underline { 18,300 } \\\hline \text { Income before income tax } & \$ 29,200 & \$ 14,500 \\\hline\end{array}\end{array}$

-Based on common size analysis, which of the following statements is correct

A) the increase in sales revenue in 20X7 was caused by higher selling and administrative expenses.
B) the increase in gross pro?t in 20X7 was due to increased sales.
C) income before income tax as a percent of sales declined in 20X1.
D) the company's cost to sales ratio improved in 20X7.

Question 29

May Company's return on equity was 21% and the financial leverage ratio was 13% (positive). What was the return on assets?

A) 8%
B) 13%
C) 21%
D) 34%

Question 30

The records of ZZZZ Better Corporation include the following: $$\begin{array} { | l | r | } \hline \text { Average total assets } & \$ 60,000 \\\hline \text { Average total liabilities } & 45,000 \\\hline \text { Total revenue } & 107,600 \\\hline \text { Total expense (including income tax) } & 104,000 \\\hline\end{array}$$ What is the return on equity?

A) 6%
B) 13%
C) 16%
D) 24%

Question 31

A common measure of profitability is the

A) current ratio.
B) cash current debt coverage ratio.
C) return on common shareholders' equity ratio.
D) debt to total assets ratio.

Question 32

Which of the following ratios usually is not considered to be a test of pro?tability?

A) Current ratio.
B) Net pro?t margin.
C) Return on assets.
D) Earnings per share.

Question 33

Financial leverage will always be which of the following?

A) Positive.
B) Negative.
C) Either positive or negative.
D) Positive, negative, or zero.

Question 34

To see if a company's cost of sales is increasing proportionately with sales an analyst would use

A) raw ?nancial data.
B) trend analysis.
C) prospective analysis.
D) common sized analysis.

Question 35

Which of the following events would likely result in a loss recognized on the write-down of inventories?

A) The additional costs resulting from an increase in oil prices caused by a hurricane destroying oil re?neries.
B) Purchasing another ?rm for more than the value of the fair market value of the assets.
C) The value of perished products for a produce company using the allowance method for inventory
D) A drop-in price of raw materials, once scarce, but now in ample supply.

Question 36

A common- size analysis of the balance sheet is most likely to signal investors that the company

A) is using assets e?ciently.
B) is becoming more liquid.
C) is becoming more leveraged.
D) has increased sale.

Question 37

A quality of earnings ratio higher than one is an indicator of which of the following?

A) A company's high debt position.
B) That ?xed assets are the company's most important resources.
C) That a company has cash generated by operations higher than the amount of pro?t.
D) That a company has too many ?xed assets.

Question 38

$\begin{array}{l}\text { Consider the following statement of earnings data for Mandrake Mills Inc. }\\\begin{array} { | l | r | r | } \hline & \mathbf { 2 0X7 } & \mathbf { 2 0 X 6 } \\\hline \text { Sales revenue } & \$ 97,300 & \$ 86,200 \\\hline \text { Less: Cost of goods sold } & \underline { 45,600 } & \underline { 53,400 } \\\hline \text { Gross profit } & 51,700 & 32,800 \\\hline \text { Selling and administration expense } & \underline { 22,500 } & \underline { 18,300 } \\\hline \text { Income before income tax } & \$ 29,200 & \$ 14,500 \\\hline\end{array}\end{array}$

-The common size percentage for selling and administration costs in 20X7 was

A) 43.5%
B) 21.2%
C) 23.1%
D) 33%

Question 39

Which is an appropriate method of preparing a common - size cash flow statement?

A) Show each line item on the cash flow statement as a percentage of total assets.
B) Show each line item on the cash flow statement as a percentage of net revenue.
C) Show each cash inflow on the cash flow statement as a percentage of total cash outflows
D) Show each line item on the cash flow statement as a percentage of total liabilities

Question 40

Which pro?t measure is best for assessing how well a ?rm operates within their industry?

A) Earnings before tax
B) Gross pro?t
C) Operating pro?t
D) Net income after tax

Question 41

In 20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%. In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which of the following statements is false?

A) P Co's return on assets (ROA) was less than half of C Co's ROA.
B) P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than their ROA. This difference is caused by P Co's higher use of debt ?nancing to leverage their assets.
C) C Co provided higher positive ?nancial leverage for their shareholders compared to P Co.
D) C Co. is considerably more liquid than P Co.

Question 42

All of the following ratios are investor measures of pro?tability except

A) payout ratio.
B) return on assets.
C) dividend yield.
D) price-earnings ratio.

Question 43

A company's optimal capital structure occurs when

A) ROA is maximized.
B) the company assets are funded by 50% debt and 50% equity.
C) the company can borrow at a rate lower than its ROA.
D) ROE is maximized.

Question 44

-Calculate C Co's profit margin ratio for 20X2 and 20X1 respectively.

A) 69.7% and 70.4%
B) 19.3% and 27.6%
C) 20.1% and 26.4%
D) 12.3% and 18.8%

Question 45

-Calculate C Co's return on assets (ROA) for 20X2.

A) 11.9%
B) 13.0%
C) 13.6%
D) 17.7%

Question 46

-Calculate C Co's return on equity (ROE) for 20X2.

A) 25.6%
B) 27.1%
C) 30.9%
D) 31.8%

Question 47

A company has a tax rate of 40%. Leverage would be beneficial for the company for each of the following combinations of interest rates and ROA except
$\begin{array} { l rr } & \text { Interest } &\mathrm{ROA} \\ &\text { rate } \\\end{array}$
a) $\begin{array} { l rr } & 4 \% &&& 6 \% \\\end{array}$
b) $\begin{array} { l rr } & 6 \% &&& 6 \% \\\end{array}$
c) $\begin{array} { l rr } & 14 \% &&& 10 \% \\\end{array}$
d) $\begin{array} { l rr } & 16 \% &&& 10 \% \\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 48

-Calculate C Co's gross profit ratio for 20X2 and 20X1 respectively.

A) 30.3% and 29.6%
B) 69.7% and 70.4%
C) 20.1% and 26.4%
D) 40.6% and 45.7%

Question 49

-Calculate C Co's current ratio for 20X2 and 20X1 respectively.

A) .54 and .59
B) .60 and .70
C) .66 and .74
D) .63 and .72

Question 50

-Calculate C Co's financial leverage and identify whether it was positive or negative.

A) 14.1% positive
B) 15.2% positive
C) 17.8% negative
D) 19.9% negative

Question 51

In 20X2, C Co's receivables turnover ratio and days' sales in receivables was 11.43 times and 31.9 days. In 20X2, P Co's receivables turnover ratio and days' sales in receivables was 9.71 times and 37.6 days. Which of the following statements is false?

A) The higher turnover ratio for C Co hurts their liquidity.
B) P Co's lower turnover ratio has an inverse relationship to its days' sales tied up in receivables.
C) C Co's management has done a better job of managing their receivables.
D) C Co appears to be more pro?table than P Co.

Question 52

Lyceum Co. reported profit of $8.3 million, interest expense of $.5 million and they are in a 30% tax rate bracket. Their average total assets are $65.8 million and average shareholders' equity is $48.6 million. What is Lyceum's financial leverage advantage or disadvantage?

A) 3.7%
B) 3.9%
C) 4.0%
D) 4.7%

Question 53

Which of the following statements about ROA is true?

A) ROA reflects the risk inherent in a company.
B) ROA is useful for comparing companies in different industries
C) ROA is the most important ratio for an equity investor
D) ROA is useful for determining how the company financed its assets

Question 54

A company that is leveraged is one that

A) has high earnings per share.
B) contains debt financing.
C) contains equity financing.
D) has a high current ratio.

Question 55

When a company's ROE is greater than its ROA for a given time-period, it could be that

A) the company could borrow at an after-tax rate that was higher than the rate earned by investing in assets
B) the company could borrow at an after-tax rate that was less than the rate earned by investing in assets.
C) the company has no debt
D) the level of debt has no impact on the ROA

Question 56

In 20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%. In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which of the following statements is false?

A) P Co's return on assets (ROA) was less than half of C Co's ROA.
B) P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than their ROA. This difference is caused by P Co's higher use of debt ?nancing to leverage their assets.
C) C Co provided higher positive ?nancial leverage for their shareholders compared to P Co.
D) C Co. is considerably more liquid than P Co.

Question 57

Proitt margin is calculated by dividing

A) sales by cost of goods sold.
B) gross profit by net sales.
C) net earnings by shareholders' equity.
D) net earnings by net sales.

Question 58

If a ?rm is using ?nancial leverage successfully what would be the impact of doubling operating earnings?

A) The return on equity will increase, but not double
B) The return on equity will double
C) The return on equity will more than double
D) The return on equity will decline by half

Question 59

In 20X2, C Co's gross pro?t ratio was 70.4% and their pro?t margin was 18.8%. In 20X2, P Co's gross pro?t ratio was 58.3% and their pro?t margin was 8.9%. Which of the following is false?

A) C Co's cost of goods sold was a lower percentage of sales than P Co's.
B) In 20X2, C Co's pro?t margin was 111.2% greater than P Co's which would contribute to a higher return on total investment.
C) The major reason for P Co's lower pro?t margin is that their selling, general and administrative expenses were double the percentage of sales compared to C Co's percentage.
D) C Co looks to be a better investment than P Co.

Question 60

-Calculate C Co's fixed asset turnover ratio for 20X2.

A) .97
B) 3.79
C) 4.87
D) 4.99

Question 61

A general rule to use in assessing the average collection period is that it

A) should not exceed 30 days.
B) can be any length as long as the customer continues to buy merchandise.
C) should not greatly exceed the discount period.
D) should not greatly exceed the credit term period.

Question 62

If trade receivables are collected quickly, it may indicate which of the following?

A) The trade receivables turnover is low.
B) The company's credit policies may be overly stringent.
C) Credit is often granted to poor credit risks.
D) The company is becoming more pro?table.

Question 63

Some of the ratios that are used to determine a company's short-term debt paying ability are

A) asset turnover, times interest earned, current ratio, and receivables turnover.
B) times interest earned, inventory turnover, current ratio, and receivables turnover.
C) times interest earned, current ratio, and inventory turnover.
D) current ratio, receivables turnover, and inventory turnover.

Question 64

-Calculate C Co's inventory turnover ratio and the days' sales in inventory for 20X2.

A) 5.89 times and 62.0 days
B) 18.41 times and 19.8 days
C) 5.58 times and 65.4 days
D) 6.11 times and 59.7 days

Question 65

A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability. Because of this transaction, the current ratio and working capital will

A) both decrease.
B) both increase.
C) remain the same and decrease, respectively.
D) increase and remain the same, respectively.

Question 66

Nunn Company reported the following data: $$\begin{array} { | l | r | } \hline \text { Quick Assets } & \$ 55,000 \\\hline \text { Current assets } & 150,000 \\\hline \text { Total Liabilities } & 12,600 \\\hline \text { Average net receivables } & 107,600 \\\hline \text { Beginning inventory } & 38,000 \\\hline \text { Long-term liabilities } & 200,000 \\\hline \text { Net credit sales } & 126,000 \\\hline \text { Cost of goods sold } & 84,000 \\\hline \text { Ending inventory } & 46,000 \\\hline\end{array}$$ What was the current ratio?

A) 0.5 to 1
B) 0.75 to 1
C) 1.5 to 1
D) 2.5 to 1

Question 67

Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?

A) Current ratio
B) Dividend yield
C) Asset turnover
D) Receivables turnover

Question 68

-Calculate C Co's quick ratio for 20X2 and 20X1 respectively.

A) .30 and .32
B) .37 and .40
C) .55 and .64
D) .56 and .54

Question 69

Which of the following is an important measure of the average movement of goods "on and off the shelf" of a company?

A) Pro?t margin.
B) Price/earnings ratio.
C) Gross inventory ratio.
D) Inventory turnover ratio.

Question 70

A company has an average inventory on hand of $40,000 and its average days in inventory are 26.4 days. What is the cost of goods sold?

A) $553,030.
B) $480,000.
C) $1,056,000.
D) $486,667.

Question 71

A liquidity ratio measures the

A) earnings or operating success of a company over a specific time period.
B) ability of the company to survive in the long-term future.
C) short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
D) number of times interest is earned.

Question 72

Hayes Company had an average age of accounts receivable of 25 days and net credit sales of $31,000. Assume a 365-day year. What was the amount of the average net receivables?

A) $1,152
B) $2,123
C) $4,000
D) $5,760

Question 73

-Calculate C Co's receivables turnover ratio and the days' sales in receivables for 20X2.

A) 11.43 times and 31.9 days
B) 11.02 times and 33.1 days
C) 11.15 times and 32.7 days
D) 3.47 times and 105.2 days

Question 74

A supplier to a company would be most interested in the

A) asset turnover ratio.
B) profit margin ratio.
C) current ratio.
D) free cash flow.

Question 75

-Calculate C Co's debt to equity ratio for 20X2 and 20X1 respectively.

A) 1.27 and 1.28
B) .79 and .78
C) .56 and .56
D) .66 and .66

Question 76

An aircraft company would most likely have

A) a high inventory turnover.
B) a low profit margin.
C) high volume.
D) a low inventory turnover.

Question 77

-Calculate C Co's times interest earned ratio for 20X2 and 20X1 respectively.

A) 11.82 and 17.93
B) 7.21 and 12.75
C) 12.33 and 19.77
D) 11.33 and 18.77

Question 78

Teel Company's working capital was $40,000 and total current liabilities were 1/4 of that amount. What was the current (working capital) ratio?

A) 1 to 1
B) 3 to 1
C) 5 to 1
D) 7 to 1

Question 79

A successful grocery store would probably have

A) a low inventory turnover.
B) a high inventory turnover.
C) zero profit margin.
D) low volume.

Question 80

Short-term creditors are usually most interested in assessing

A) solvency.
B) liquidity.
C) marketability.
D) pro?tability.