Question 1

Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.

Accepted Answer

A) True 
 B)False

Question 2

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?

Accepted Answer

A)  commercial paper held by the company 
B)  the inventory of chemicals used to produce the drugs made by the company 
C)  a patent for a drug held by the company 
D)  the cash reserves of the company

Question 3

Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?

Accepted Answer

A)  Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. 
B)  Company A has greater leverage than Company B. 
C)  Company A has less leverage than Company B. 
D)  Company A and Company B have roughly equivalent enterprise values.

Question 4

Balance Sheet   Net property, plant,
 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)  $131 million 
B)  $6 million 
C)  $88 million 
D)  $45 million

Question 5

Which of the following best describes why a firm produces financial statements?

Accepted Answer

A)  to use as a tool when planning future investments within a firm 
B)  to increase the intrinsic value of a firm 
C)  to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business 
D)  to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future

Question 6

Use the table for the question(s) below.
Income Statement for Xenon Manufacturing:
  Selling, general,
  Earnings before interest
 
-Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2008 and 2009. What does the change in the operating margin between these two years imply about the company?

Accepted Answer

A)  The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009. 
B)  The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2008 and 2009. 
C)  The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009. 
D)  The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.

Question 7

Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?

Accepted Answer

A)  1.17 
B)  0.94 
C)  2.81 
D)  2.35

Question 8

What are the four financial statements that all public companies must produce?

Accepted Answer

The answer of What are the four financial statements that...

Question 9

Which of the following statements regarding the income statement is INCORRECT?

Accepted Answer

A)  The income statement shows the cash flows and expenses at a given point in time. 
B)  The income statement shows the flow of revenues and expenses generated by a firm between two dates. 
C)  The last or "bottom" line of the income statement shows a firm's net income. 
D)  The first line of an income statement lists the revenues from the sales of products or services.

Question 10

In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.

Accepted Answer

A) True 
 B)False

Question 11

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?

Accepted Answer

A)  Since net working capital is negative, the company will not have enough funds to meet its obligations. 
B)  Since net working capital is high, the company will likely have little difficulty meeting its obligations. 
C)  Since net working capital is very high, the company will have ample money to invest after it meets its obligations. 
D)  Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.

Question 12

Use the table for the question(s) below.
 
-Refer to the partial balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's market-to-book ratio?

Accepted Answer

The answer of Use the table for the question(s) below.
...

Question 13

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?

Accepted Answer

A)  a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals 
B)  a low-end retailer that has a low mark-up on all items it sells 
C)  a brokerage firm that has high levels of leverage 
D)  a grocery store chain that has very high turnover, selling many multiples of its assets per year

Question 14

Balance Sheet   Net property, plant,
 The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has 5 million shares outstanding, and these shares are trading at a price of $6.39 per share, what does this tell you about how investors view this firm's book value?

Accepted Answer

A)  Investors consider that the firm's market value is worth very much less than its book value. 
B)  Investors consider that the firm's market value is worth less than its book value. 
C)  Investors consider that the firm's market value and its book value are roughly equivalent. 
D)  Investors consider that the firm's market value is worth more than its book value.

Question 15

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?

Accepted Answer

A)  The assets should have been listed on the balance sheet as long-term assets. 
B)  Cash raised by selling assets should not be recorded as revenue. 
C)  The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&
A)  or notes to the financial statement. 
D)  Both B and C are deceptive.

Exam 2: Introduction to Financial Statement Analysis