Question 1

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

-A 30-year mortgage loan is a

Accepted Answer

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

Question 2

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 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.

Question 3

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

Accepted Answer

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 4

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?

Accepted Answer

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 5

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?

Accepted Answer

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 6

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

Accepted Answer

The answer of What is the role of an auditor...

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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?

Accepted Answer

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 10

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

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

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?

Accepted Answer

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

Exam 2: Introduction to Financial Statement Analysis

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?

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

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 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?

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

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

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

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?

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

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.