Question 1

Judith Corp. has current assets worth $50,000 and current liabilities worth $75,000. Current assets include inventory of $10,000. Calculate current ratio.

Accepted Answer

A)  1.500 
B)  0.533 
C)  0.625 
D)  0.667

Question 2

Which of the following is a difference between internal comparison and external comparison with regard to financial statement analysis?

Accepted Answer

A)  An internal comparison reveals unexpected relationships within a company, whereas an external comparison reveals the absence of expected relationships outside a company. 
B)  An internal comparison involves comparing a company with the industry as a whole, whereas an external comparison involves comparing a company's current performance with its past experience. 
C)  An internal comparison is done by an accountant or auditor, whereas an external comparison is done by a forensic accountant. 
D)  An internal comparison allows the examination of changes within a company over time, whereas an external comparison reveals the company's relative performance and financial standing.

Question 3

Financial statements rarely, if ever, represent economic reality.

Accepted Answer

A) True 
 B)False

Question 4

Personal balance sheet provides a snapshot of an individual's financial condition at a specific point in time.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following best defines the term earnings management?

Accepted Answer

A)  It is the intervention by the management in the internal financial reporting process, with the intent of boosting the earnings of an organization. 
B)  It is the purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain. 
C)  It is the legitimate alteration of internal reports by the management to influence contractual outcomes that depend on reported accounting numbers. 
D)  It is a systematic management of earnings of an organization by its external shareholders, with the intent of increasing future profits.

Question 6

Which of the following does a discrepancy in cash flow reconciliation indicate?

Accepted Answer

A)  The cash outflow is greater than the cash inflow. 
B)  The cash flow statement reflects entries for intercompany cash flows and transactions. 
C)  Certain cash transactions are not accurately reflected in the income statement and balance sheet. 
D)  There was an unexpected surge of cash flow during the period.

Question 7

Which of the following is true of the application of ratio analysis?

Accepted Answer

A)  These are as reliable as the source data. 
B)  Analysts should use simple rules of thumb when applying these. 
C)  These represent causes, not effects. 
D)  Accounting estimates in the data do not impact ratios.

Question 8

Amounts shown on financial statements reflect current values.

Accepted Answer

A) True 
 B)False

Question 9

Arcket, Inc. is a publicly traded nonmanufacturing company. The following information is available from its financial statements: Net working capital $200,000
Retained earnings $125,000
Earnings before Interest and taxes $375,000
Market value of equity $1,015,000
Book value of total debt $1,750,000
Total assets $2,500,000
Sales $1,500,000
Calculate and interpret the Altman's Z-score for Arcket, Inc.

Accepted Answer

A)  1.6084; Bankrupt 
B)  2.312; Zone of ignorance 
C)  1.40816; Zone of ignorance 
D)  2.9108; Non-bankrupt

Exam 5: Financial Statements Analysis Reading Between the Lines

Judith Corp. has current assets worth $50,000 and current liabilities worth $75,000. Current assets include inventory of $10,000. Calculate current ratio.

Which of the following is a difference between internal comparison and external comparison with regard to financial statement analysis?

Financial statements rarely, if ever, represent economic reality.

Personal balance sheet provides a snapshot of an individual's financial condition at a specific point in time.

Which of the following best defines the term earnings management?

Which of the following does a discrepancy in cash flow reconciliation indicate?

Which of the following is true of the application of ratio analysis?

Amounts shown on financial statements reflect current values.