Deck 2: Introduction to Financial Statement Analysis

Question 1

International Financial Reporting Standards are taking root throughout the world.However,it is unlikely that the Canada will report according to IFRS before the second half of the twenty-first century.

Answer 1

False

Question 2

Use the table for the question(s) below.
Statement of Financial Position

The above diagram shows a statement of financial position for a certain company.All quantities shown are in millions of dollars.If the company has 4 million shares outstanding,and these shares are trading at a price of $8.24 per share,what does this tell you about how investors view this firm's book value?

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.
E) Investors consider that the firm's market value is worth much more than its book value.

Answer 2

Investors consider that the firm's market value and its book value are roughly equivalent.

Question 3

Financial statements are accounting reports issued periodically by a firm that present information on the past performance of the firm,a summary of the firm's assets and the financing of those assets,and a prediction of the firm's future performance.

Answer 3

False

Question 4

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP)and verifies that the information reported is reliable is the

A) TSX Enforcement Board.
B) Accounting Standards Board.
C) provincial securities commission.
D) auditor.
E) GAAP commission.

Question 5

The statement of financial position shows the assets,liabilities,and stockholders' equity of a firm over a given length of time.

Question 6

Which of the following best describes why the left and right sides of a statement of financial position are equal?

A) In a properly run business, the value of liabilities will not exceed the assets held by the company.
B) By definition, the assets plus the liabilities will be the same as the stockholders' equity.
C) The assets must equal liabilities plus stockholders' equity, because stockholders' equity is the difference between the assets and the liabilities.
D) By accounting convention, the assets of a company must be equal to the liabilities of that company.
E) Assets must always exceed liabilities or the company will be bankrupt.

Question 7

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

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
E) money owed to the firm by customers who have purchased goods on credit

Question 8

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?

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.
E) Since net working capital is negative, the company will likely have little difficulty meeting its obligations.

Question 9

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

Question 10

Use the table for the question(s) below.
Statement of Financial Position

The above diagram shows a statement of financial position for a certain company.All quantities shown are in millions of dollars.How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year?

A) Net property, plant, and equipment would rise to $126 million, and Total Assets and Stockholders' Equity would be adjusted accordingly.
B) Net property, plant, and equipment would fall to $116 million, and Total Assets and Stockholders' Equity would be adjusted accordingly.
C) Long-Term Liabilities would rise to $182 million, and Total Liabilities and Stockholders' Equity would would be adjusted accordingly.
D) Long-Term Liabilities would fall to $172 million, and Total Liabilities and Stockholders' Equity would be adjusted accordingly.
E) Net property, plant, and equipment would be unchanged, and Total Assets and Stockholders' Equity would also remain the same.

Question 11

Which of the following best describes why firms produce financial statements?

A) to use as a tool when planning future investments within the firm
B) to provide a means of enticing new investors to a firm
C) to provide interested parties, both inside and outside the company, with an overview of the short- and long-term financial condition of a business
D) to show what activities the company has undertaken in the previous financial year, and what activities are planned for the near future
E) to determine managerial performance

Question 12

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

Question 13

What is the main problem in using a statement of financial position to provide an accurate assessment of the value of a company's equity?

A) Valuable assets such as the company's reputation, the quality of its work force, and the strength of its management are not captured on the statement of financial position.
B) The statement of financial position does not accurately represent the book value of assets held by the company.
C) The equity shown on the statement of financial position does not reflect the market capitalization of the company.
D) Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.
E) The statement of financial position does not provide enough detail about the company's equity.

Question 14

A delivery company is creating a statement of financial position.Which of the following would most likely be considered a short-term liability on this statement of financial position?

A) the depreciation over the last year in the value of the vehicles owned by the company
B) revenue received for the delivery of items that have not yet been delivered
C) a loan which must paid back in two years' time
D) prepaid rent on the offices occupied by the company
E) money owed to the firm by customers who have purchased goods on credit

Question 15

The major components of shareholders' equity are

A) cash, common stock, and paid-in surplus.
B) common stock, paid-in surplus, and net income.
C) common stock, paid-in surplus, and retained earnings.
D) common stock, liabilities, and retained earnings.
E) cash, paid-in surplus, and retained earnings.

Question 16

Which of the following amounts would be included on the right side of a statement of financial position?

A) the value of government bonds held by the company
B) the cash held by the company
C) the amount of deferred tax liability held by the company
D) the amount of money owed to the company by customers who have not yet paid for goods and services they have received
E) the value of inventories held by the company

Question 17

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?

A) It is easier to find specific information in such a report if it is laid out in a clear and consistent manner.
B) It ensures that information on the performance of private companies is readily available to the public.
C) It ensures that important information is not omitted and superfluous information is not included.
D) It makes it easier to compare the financial results of different firms.
E) To make sure they satisfy the auditor.

Question 18

Shareholders' equity is the difference between a firm's assets and liabilities,as shown on the statement of financial position.

Question 19

Use the table for the question(s) below.
Statement of Financial Position

The above diagram shows a statement of financial position for a certain company.All quantities shown are in millions of dollars.What is the company's net working capital?

A) $7 million
B) $32 million
C) $33 million
D) $40 million
E) $20 million

Question 20

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

Question 21

Which of the following statement of financial position equations is correct?

A) Assets - Liabilities = Shareholders' Equity
B) Assets + Liabilities = Shareholders' Equity
C) Assets - Current Liabilities = Long Term Liabilities
D) Assets + Current Liabilities = Long Term Liabilities + Shareholders' Equity
E) Assets + Current Liabilities = Long Term Liabilities - Shareholders' Equity

Question 22

Secure Energy Services has 20 million shares outstanding,with a current share price of $12.15 per share.If the firm's market-to-book ratio is 4.5,what is the firm's book value of equity?

A) $7.4 million
B) $54 million
C) $20 million
D) $90 million
E) $243 million

Question 23

Ivanhoe Energy Inc has 36 million shares outstanding,with a current share price of $21.45 per share.If the firm's book value of equity is $80 million,what is its market-to-book ratio?

A) 0.45
B) 2.22
C) 9.65
D) 0.10
E) 3.73

Question 24

A stock has 94 million shares outstanding,with a current share price of $3.53 per share.If the firm's book value of equity is $120 million,what is its market-to-book ratio?

A) 2.77
B) 0.38
C) 1.28
D) 0.78
E) 3.53

Question 25

A firm has 41 million shares outstanding with a current share price of $4.30 The firm has a market-to-book ratio of 8.5 and a book debt-equity ratio of 2.2.If the firm currently has $18 million in cash,what is its enterprise value?

A) $176 million
B) $204 million
C) $148 million
D) $49 million
E) $240 million

Question 26

Use the table for the question(s) below.


Refer to the statement of financial position above.What is Luther's net working capital in 2014?

A) $12 million
B) $27 million
C) $39 million
D) $45 million
E) $63.6 million

Question 27

What is a firm's net income?

A) earnings before interest and taxes are deducted
B) the third line of an income statement that represents the difference between sales revenues and costs
C) a measure of the firm's profitability over a given period
D) net sales less cost of sales
E) earnings after interest is deducted but before taxes are deducted

Question 28

What will be the effect on the statement of financial position if a firm buys a new processing plant through a new loan?

Question 29

Use the table for the question(s) below.


Refer to the statement of financial position above.If on December 31,2014 Luther has 8 million shares outstanding trading at $15 per share,then what is Luther's enterprise value?

Question 30

In general,a successful firm will have a market-to-book ratio that is substantially greater than 1.

Question 31

A firm has 12 million shares outstanding with a current share price of $8.50.The firm has a market-to-book ratio of 3.55 and a book debt-equity ratio of 0.8.If the firm currently has $4 million in cash,what is its enterprise value?

A) $121 million
B) $83 million
C) $180 million
D) $102 million
E) $125 million

Question 32

How does a firm select the date for preparation of its statement of financial position?

Question 33

Use the table for the question(s) below.


Refer to the statement of financial position above.If in 2015 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then Luther's stock would be considered to be

A) undervalued.
B) overvalued.
C) a growth stock.
D) a value stock.
E) worthless.

Question 34

A public company has a book value of $128 million.They have 20 million shares outstanding,with a market price of $4 per share.Which of the following statements is true regarding this company?

A) Investors may consider this firm to be a growth company.
B) Investors believe the company's assets are not likely to be profitable since its market value is worth less than its book value.
C) The firm's market value is more than its book value.
D) The value of the firm's assets are greater than their liquidation value.
E) The firm's market-to-book ratio is greater than 1.

Question 35

The income statement reports the firm's revenues and expenses,and it computes the firm's bottom line of net income,or earnings.

Question 36

Use the table for the question(s) below.


Refer to the statement of financial position above.If in 2015 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then Luther's market-to-book ratio would be closest to:

A) 0.39
B) 0.76
C) 1.29
D) 2.57
E) 0.31

Question 37

Use the table for the question(s) below.


Refer to the statement of financial position above.If on December 31,2014 Luther has 8 million shares outstanding trading at $15 per share,then what is Luther's market-to-book ratio?

Question 38

Use the table for the question(s) below.


Refer to the statement of financial position above.If in 2015 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then what is Luther's enterprise value?

A) -$63.3 million
B) $353.1 million
C) $389.7 million
D) $516.9 million
E) $163.2 million

Question 39

CIBC has 110 million shares outstanding,with a current share price of $94.50 per share.If the firm's market-to-book ratio is 7.85,what is the firm's book value of equity?

A) $5.6 billion
B) $0.9 billion
C) $10.4 billion
D) $1.3 billion
E) $2.75 billion

Question 40

MTS has 83 million shares outstanding with a current share price of $19.25.The firm has a market-to-book ratio of 4.17 and a book debt-equity ratio of 1.59.If MTS currently has $24 million in cash,what is its enterprise value?

A) $0.968 billion
B) $4.115 billion
C) $1.598 billion
D) $2.183 billion
E) $1.013 billion

Question 41

Use the table for the question(s) below.

Refer to the income statement above.For the year ending December 31,2015 Luther's earnings per share are closest to:

A) $1.01
B) $1.04
C) $1.58
D) $4.04
E) $10.77

Question 42

Use the table for the question(s) below.
Income Statement for CharmCorp:

How does a firm select the dates for preparation of its income statement?

Question 43

Use the table for the question(s) below.
Income Statement for CharmCorp:

What will be the effect on the income statement if a firm buys a new processing plant through a new loan?

Question 44

A firm has EBIT of $29 million,interest expense of $4.5 million,and pays taxes of $8 million.If the firm has 15 million shares outstanding,what is the firm's EPS?

A) $1.93
B) $1.10
C) $1.40
D) $1.63
E) $0.91

Question 45

Use the table for the question(s) below.
Income Statement for CharmCorp:

Consider the above Income Statement for CharmCorp.All values are in millions of dollars.If CharmCorp has 6 million shares outstanding,and its managers and employees have stock options for 1 million shares,what is its diluted EPS in 2015?

A) $1.42
B) $1.67
C) $2.00
D) $2.33
E) $3.71

Question 46

Which of the following is a way that the Operating Activity section of the statement of cash flows adjusts Net Income from the balance sheet?

A) It subtracts all expenses and costs related to the firm's operating activities.
B) It adds all non-cash entries related to the firm's operating activities.
C) It adds the cash that flows from investors to the firm.
D) It removes the cash used for investment purposes.
E) It adds cash received from investments.

Question 47

Gross profit is calculated as

A) Total sales - Cost of sales - Selling, general, and administrative expenses - Depreciation and amortization.
B) Total sales - Cost of sales - Selling, general, and administrative expenses.
C) Total sales - Cost of sales.
D) Total sales - Cost of sales - Interest expense.
E) Total sales - Cost of sales - Interest expense -Taxes.

Question 48

A firm has gross profit of $45 million,EBIT of $20 million,and net income of $8.5 million.If the firm has 5 million shares outstanding,what is the firm's EPS?

A) $9.00
B) $4.00
C) $1.70
D) $2.30
E) $5.00

Question 49

Use the table for the question(s) below.

Refer to the income statement above.Assuming that Luther has no convertible bonds outstanding,then for the year ending December 31,2015 Luther's diluted earnings per share are closest to:

A) $1.01
B) $1.04
C) $1.53
D) $3.92
E) $4.04

Question 50

A printing company prints a brochure for a client,and then bills them for this service.At the time the printing company's financial disclosure statements are prepared,the client has not yet paid the bill for this service.How will this transaction be recorded?

A) The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows.
B) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.
C) The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows.
D) The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.
E) The sale will be deducted from Net Income on the income statement but added to Net Income on the statement of cash flows.

Question 51

A firm has gross profit of $142 million,EBIT of $94 million,and net income of $55 million.If the firm has 28 million shares outstanding,what is the firm's EPS?

A) $1.39
B) $3.36
C) $1.71
D) $2.30
E) $1.96

Question 52

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel.Where would this purchase be reflected on the Statement of Cash Flows?

A) It would be an expense on the income statement, so it would be reflected in operating cash flows.
B) It would be an addition to property, plant and equipment, so it would be an investing activity.
C) It would be an addition to cash, so would be reflected in the change in cash.
D) It would be an increase in borrowing, so would be reflected in financing activities.
E) It would be a change in inventory, so would be reflected in operating activities.

Question 53

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

Question 54

The firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

Question 55

Use the table for the question(s) below.

Refer to the income statement above.Luther has convertible bonds outstanding that would allow bondholders to convert their bonds into 700,000 shares of Luther stock.For the year ending December 31,2015 Luther's diluted earnings per share are closest to:

A) $0.95
B) $1.01
C) $1.04
D) $1.53
E) $3.92

Question 56

What is a firm's gross profit?

A) the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by the firm in a given period
B) the difference between sales revenues and the costs associated with those sales
C) the difference between sales revenues and cash expenditures associated with those sales
D) earnings before interest and taxes are deducted
E) earnings after interest is deducted but before taxes are deducted

Question 57

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?

A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows.
B) It will be depreciated over time on the income statement and subtracted as Inventory 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.
E) It will be depreciated over time on the income statement and added as accounts payable on the statement of cash flows.

Question 58

Use the table for the question(s) below.

Refer to the income statement above.Luther's earnings before interest,taxes,depreciation,and amortization (EBITDA)for the year ending December 31,2015 is closest to:

A) $10.6 million
B) $19.7 million
C) $37.6 million
D) $41.2 million
E) $44.8 million

Question 59

A firm has EBIT of $4.5 million,interest expense of $400,000,and pays taxes of $1.2 million.If the firm has 2 million shares outstanding,what is the firm's EPS?

A) $1.45
B) $2.25
C) $1.65
D) $0.69
E) $1.00

Question 60

Use the table for the question(s) below.
Income Statement for Xenon Manufacturing:

Consider the above Income Statement for Xenon Manufacturing.All values are in millions of dollars.If Xenon Manufacturing has 25 million shares outstanding,what is its EPS in 2015?

A) $0.36
B) $0.40
C) $0.63
D) $0.84
E) $0.64

Question 61

Solid State Software has retained earnings of $42 million,after paying dividends of $10 million.What was the firm's payout ratio?

A) 0.24
B) 0.81
C) 0.19
D) 0.62
E) 4.20

Question 62

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts,if true,in the firm's management discussion and analysis (MD&A)?

A) that a large number of funds were allocated to advertising to increase awareness of the firm's brand in new areas it had expanded into this year
B) that some senior members of the management team have retired in this financial year
C) that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages
D) that the firm has plans to expand into the organic food business in the next financial year by purchasing several small organic food retailers
E) that food prices have increased, increasing the firm's costs

Question 63

Use the table for the question(s) below.

Refer to the income statement above.Luther's return on assets (ROA)for the year ending December 31,2015 is closest to:

A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%
E) 32.5%

Question 64

Use the table for the question(s) below.
Income Statement for Xenon Manufacturing:

Consider the above Income Statement for Xenon Manufacturing.All values are in millions of dollars.Calculate the operating margin for 2014 and 2015.What does the change in the operating margin between these two years imply about the company?

A) The efficiency of Xenon Manufacturing has significantly risen between 2014 and 2015.
B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2014 and 2015.
C) The efficiency of Xenon Manufacturing has significantly fallen between 2014 and 2015.
D) The leverage of Xenon Manufacturing fell slightly between 2014 and 2015.
E) The revenues available to equity holders fell slightly between 2014 and 2015.

Question 65

Use the table for the question(s) below.
AOS Industries Statement of Cash Flows for 2015

Consider the above statement of cash flows.What were AOS Industries' major means of raising money in 2015?

A) from investment activities
B) by sale of stock
C) from its operations
D) by issuing debt
E) from short-term bank loans

Question 66

How can we cross check the statement of cash flows?

Question 67

What is the need for the notes to the financial statements when the firm's operations are already documented in the financial statements?

Question 68

Use the table for the question(s) below.

Refer to the income statement above.Luther's net profit margin for the year ending December 31,2014 is closest to:

A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%
E) 18.3%

Question 69

Use the table for the question(s) below.

Refer to the income statement above.Luther's operating margin for the year ending December 31,2014 is closest to:

A) 1.8%
B) 2.7%
C) 5.4%
D) 6.8%
E) 16.7%

Question 70

Which type of transactions must be disclosed in the management discussion and analysis?

A) transactions that significantly affect the firm's leverage
B) off balance sheet transactions
C) off income statement transactions
D) very large transactions
E) transactions that reduce the firm's net income

Question 71

Use the table for the question(s) below.
Income Statement for Xenon Manufacturing:

Consider the above Income Statement for Xenon Manufacturing.All values are in millions of dollars.Calculate the gross margin for 2014 and 2015.What does the change in the net profit margin between these two years imply about the company?

A) The efficiency of Xenon Manufacturing has significantly risen between 2014 and 2015.
B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2014 and 2015.
C) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2014 and 2015.
D) The leverage of Xenon Manufacturing fell slightly between 2014 and 2015.
E) The revenues available to equity holders fell slightly between 2014 and 2015.

Question 72

A software company acquires a smaller company in order to acquire the patents that it holds.Where will the cost of this acquisition be recorded on the statement of cash flows?

A) as an outflow under Operating Activities
B) as an outflow under Investment Activities
C) as an outflow under Financial Activities
D) The acquisition would not be recorded on the statement of cash flows.
E) as an inflow under Financial Activities

Question 73

Use the table for the question(s) below.
AOS Industries Statement of Cash Flows for 2015

Consider the above statement of cash flows.Which of the following is true of AOS Industries' operating cash flows?

A) It collected more cash from its customers than they charged.
B) It sold more inventory than it bought.
C) It charged more on its accounts payable than it paid back.
D) It charged less on its accounts payable than it paid back.
E) It used $1.4 million of its cash on depreciation and amortization.

Question 74

Use the table for the question(s) below.
AOS Industries Statement of Cash Flows for 2015

Consider the above statement of cash flows.If all amounts shown above are in millions of dollars,what was AOS Industries' change in retained earnings for 2015?

A) $1.3 million
B) $1.7 million
C) $2.1 million
D) $5.4 million
E) $3.2 million

Question 75

Use the table for the question(s) below.
Income Statement for Xenon Manufacturing:

Consider the above Income Statement for Xenon Manufacturing.All values are in millions of dollars.Calculate the gross margin for 2014 and 2015.What does the change in the gross margin between these two years imply about the company?

A) The efficiency of Xenon Manufacturing has significantly risen between 2014 and 2015.
B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2014 and 2015.
C) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2014 and 2015.
D) The leverage of Xenon Manufacturing fell slightly between 2014 and 2015.
E) The revenues available to equity holders fell slightly between 2014 and 2015.

Question 76

Use the table for the question(s) below.

Refer to the income statement above.Luther's return on equity (ROE)for the year ending December 31,2015 is closest to:

A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%
E) 32.5%

Question 77

Farhan's Fences has retained earnings of $2.5 million,after paying dividends of $1.5 million.What was the firm's payout ratio?

A) 0.38
B) 0.60
C) 0.63
D) 1.50
E) 1.67

Question 78

Use the table for the question(s) below.
AOS Industries Statement of Cash Flows for 2015

Consider the above statement of cash flows.In 2015,AOS Industries had contemplated buying a new warehouse for $2 million,the cost of which would be depreciated over 10 years.If AOS Industries has a tax rate of 25%,what would be the impact on the amount of cash held by AOS at the the end of the 2015?

A) It would have $2,00,000 less cash at the end of 2015.
B) It would have $1,950,000 less cash at the end of 2015.
C) It would have $150,000 less cash at the end of 2015.
D) It would have an additional $50,000 in cash at the end of 2015.
E) It would have $1,800,000 less cash at the end of 2015.

Question 79

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

Question 80

What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?