Question 1

The following data comes from Beaumont Company's financial statements for the year ended December 31, 2014.(Assume that the balance sheet amounts represent both average and ending balances.) $$\begin{array} { l r } 
\text { Cash } & \$ 5,000 \
\text { Accounts receivable } & 75,000 \
\text { Inventory } & 32,500 \
\text { Sales } & 525,000 \
\text { Cost of goods sold } & 315,000 \
\text { Net income } & 42,500
\end{array}$$ What are Beaumont's average collection period of accounts receivable and their average number of inventory days on hand closest to? $\begin{array}{ll}\text { Accounts } & \text { Inventory } \
\text { receivable } & \text { days on } \
\text { collection } & \text { hand }\
\text { A) } 52 \text { days } & 38 \text { days } \
\text { B) } 52 \text { days } & 23 \text { days } \
\text { C) } 87 \text { days } & 38 \text { days } \
\text { D) } 87 \text { days } & 23 \text { days }
\end{array}$

Accepted Answer

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

Question 2

What would an increase in the accrual based interest coverage ratio be an indication of?

Accepted Answer

A) That interest rates have risen. 
B) That the company's solvency has improved. 
C) That the company's solvency has deteriorated. 
D) That the company's use of financial leverage has increased.

Question 3

Which of the following mechanisms is least likely to discourage management bias in the presentation of financial information?

Accepted Answer

A) Debt covenants 
B) Securities regulators 
C) Class action lawsuits 
D) External Auditors

Question 4

What is Wang's profit margin closest to?

Accepted Answer

A) 6.25% 
B) 10.4% 
C) 13.8% 
D) 19.4%

Question 5

A) What kind of information would you expect to find in the Management Discussion and Analysis
(MD&A)?
B) Who should read the MD&A?
C) What is the intent of the MD&A?
D) What types of companies prepare a MD&A?
E) How reliable is the information in the MD&A?

Accepted Answer

The answer of A) What kind of information would you...

Question 6

Integrated Corporation manufactures and sells cotton clothing: T-shirts, sweatshirts and socks.They manufacture the products in their two facilities in Quebec and then sell them in their own retail outlets, "Cotton Plus," or to other retailers.They also have the facilities to print designs and logos on the shirts.During
2013 they decided to close both manufacturing facilities and source the products from China.They will still continue to print the shirts and sell to other retailers and in their own stores.
A) Explain how their decision to close the manufacturing facilities will affect the 2013 financial statements.B) How does the presentation you described in A) assist users of the financial statements?
C) Assume the facilities are successfully closed in 2014.What is the impact on the 2014 financial statements?

Accepted Answer

The answer of Integrated Corporation manufactures and sells cotton clothing:...

Question 7

What is the first step in the successful analysis of an entity?

Accepted Answer

A) Read the financial statements. 
B) Prepare a financial ratio analysis. 
C) Interview management. 
D) Find as much information as possible about the entity.

Question 8

Cross Lake Ltd.is a widely held public company.When trying to decide what dividends to pay, all of the following would be factors, except:

Accepted Answer

A) shareholders' cash needs. 
B) effect on the company's debt-to-equity ratio. 
C) effect on the share price. 
D) cash requirements of the entity.

Question 9

An analyst has calculated the ratio of research and development expenses to sales for a company he is following and noticed that it is significantly lower this year than in the previous years.What might this be an indication of?

Accepted Answer

A) That management might be attempting to increase current earnings. 
B) That management might be attempting to increase future earnings. 
C) That the earnings quality is higher than it was before. 
D) That the profitability of the company is higher than it was before.

Question 10

All of the following are items that management could use to manage earnings except:

Accepted Answer

A) bad debt expense. 
B) warranty expense. 
C) asset write-downs. 
D) sales expense.

Question 11

Hartney Company has just hired a new president to help the company recover after two years of declining sales and profits.The president has announced that they will be writing down $100 million in assets and increasing the allowance for doubtful accounts for the year, to clear out some old amounts.When preparing a ratio analysis of this company, the user should be aware of which of the following limitations of financial ratios?

Accepted Answer

A) Financial statements are historical. 
B) Managers prepare financial statements. 
C) Accounting policies and estimates affect ratios. 
D) Financial statements are not the only source of information.

Question 12

What is Wang's return on assets closest to?

Accepted Answer

A) 6.05% 
B) 6.25% 
C) 6.45% 
D) 6.52%

Question 13

Grandview Company reported net earnings of $425,000 for 2014.Their retained earnings were $1,125,000 on January 1, 2014, and $1,425,000 on December 31, 2014.Grandview had 50,000 common shares outstanding throughout the year with a recorded value of $200,000.What were their earnings per share (EPS) and dividends per share (DPS) for 2014?
$\quad $ $\underline{\text { EPS }} \quad \underline{\text { DPS }}$
A. $ \$ 2.125 \quad \$ 0 $
B. $ \$ 2.125 \quad \$ 2.50 $
C. $ \$ 8.50 \quad \$ 0 $
D. $ \$ 8.50 \quad \$ 2.50 $

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D
EPS = $425,000/50,000 = $8.50, Dividends paid = Net income minus the change in retained earnings =

Question 14

Which analytical tool gives the best indication of the growth and decline of an entity?

Accepted Answer

A) Vertical analysis 
B) Horizontal analysis 
C) Return on asset 
D) Profit margin

Question 15

If a user wanted to analyze the discretionary expenses, which of the following would be the most useful analytical tool?

Accepted Answer

A) Horizontal analysis 
B) Vertical analysis 
C) Gross margin 
D) Return on sales

Question 16

What are Wang's current ratio and acid test ratio? $\begin{array}{ll}
&\text { Current } & \text { Acid Test } \
&\text { Ratio } & \text { Ratio }\\text { A) } & 1.4 & .50 \
\text { B) } & 1.4 & .80 \
\text { C) } & 6.0 & .50 \
\text { D) } & 6.0 & .80
\end{array}$

Accepted Answer

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

Question 17

Barrhead Ltd.has a covenant that requires them to maintain a current ratio of 1 to 3.Which of the following users most likely imposed the covenant?

Accepted Answer

A) Banker 
B) Shareholders 
C) Canada Revenue Agency 
D) Management

Question 18

Riverton Company had earnings per share last year of $4.00 and an average share price of
$48.00.Riverton uses the declining balance method of amortizing its capital assets and has not reported any large unusual items in the past few years.They have also reported cash from operations that closely mirror the changes in their net earnings.Silver Ltd is a competitor of Riverton and is trying to determine why its share price seems to be low compared to Riverton's share price.Silver's earnings per share last year were $6.00 and the historical price earnings ratio is currently 8 times.Silver uses the straight-line method for amortizing its capital assets and regularly reports large losses when it sells capital assets.Last year they also reported some gains from selling off a piece of land and from the settlement of a lawsuit.
Required:
A) Calculate the price earnings ratio for Riverton Company.
B) What does Riverton's P/E ratio tell you about the market's expectations for its shares as compared to the market's expectation for Silver Ltd's shares? What does it tell you about the assessment of their respective risks? C) What was the average price of Silver's shares?
D) Why do you think the two companies have different price earnings ratios?

Accepted Answer

The answer of Riverton Company had earnings per share last...

Question 19

During the past year, a company had some land expropriated by the local government when the city was widening a road.Management included the gain in operating income as an offset to losses incurred on the sale of some other assets, as they decided that both events were related to fixed assets.This decision by management could be interpreted as earnings management for which of the following reasons?

Accepted Answer

A) It violates the principles of revenue recognition. 
B) It involves management manipulation regarding the timing of the write-down of an asset. 
C) It is an example of a big bath. 
D) It does not disclose the information on the income statement as per the accounting principles and standards.

Question 20

What does the gross margin percentage measure?

Accepted Answer

A) The percentage of each sales dollar that the entity earns in profit. 
B) The amount of profit available to meet operating expenses. 
C) The amount of profit being generated by the company's assets. 
D) The average time it takes the company to turn inventory into profit.

Exam 12: Analyzing and Interpreting Financial Statements