Deck 1: Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Question 1

Which of the following is not one of Porter's five forces?

A) Buyer Power
B) Supplier power
C) Threat of Regulation
D) Threat of Substitutes

Answer 1

C

Question 2

Which of the following is not an activity reported in the cash flows financial statement?

A) operating
B) investing
C) manufacturing
D) financing

Answer 2

C

Question 3

When assessing buyer power using Porter's five forces which of the following is not consistent with low buyer power?

A) Brand loyalty
B) Control of distribution channel
C) Large number of suppliers
D) Low price

Answer 3

C

Question 4

The accrual basis of accounting recognizes

A) revenue when cash is received from customers
B) expenses when paid
C) revenue when all or a substantial portion is performed
D) revenue when contracts are signed

Question 5

A value chain for an industry sets forth

A) the layers of management the needed to be successful
B) sequence of activities involved in the creation, manufacture and distribution of its products.
C) Sequence of activities involved in a firm's research and development activities.
D) Whether the industry is horizontally or vertically integrated.

Question 6

Which of the following economic characteristics is consistent with a grocery store chain?

A) Low barriers to entry.
B) High levels of research and development.
C) High profit margins.
D) Low capital intensity.

Question 7

On a common size basis, which of the following assets is normally largest for a electric utility?

A) Accounts receivable
B) Inventory
C) Property, Plant and Equipment
D) Cash and Marketable Securities

Question 8

The accrual basis method of accounting can be best described as:

A) The recording of transactions and adjustments so that debits equal credits.
B) The method that equates assets with liabilities and owners' equity.
C) The method that recognizes revenue when money is received.
D) The method that matches incurred expenses with related revenues when they are earned.

Question 9

Which of the following assets would appear on the balance sheet at an amount greatly below its fair market value?

A) inventory
B) marketable securities
C) equipment
D) brand name

Question 10

The third step in financial statement analysis is to assess the quality of the firm's financial statements. Which of the following is a question an analyst should ask when performing this step?

A) Are industry sales growing rapidly or slowly?
B) Do earnings include revenues that appear mismatched with the business model employed by the firm?
C) Does the industry include a large number of firms selling similar products?
D) What is the company's degree of geographical diversification?

Question 11

Which of the following is a question an analyst would ask when assessing the quality of a firm's financial statements?

A) Are the company's products designed to meet a specific market segment?
B) Has the firm integrated forward into retailing to final consumers?
C) Is the firm diversified across several geographical markets?
D) Do earnings include nonrecurring gains or losses?

Question 12

An example of an intangible asset is

A) a patent
B) land
C) investment in another company
D) raw material inventory

Question 13

Which of the following economic characteristics is consistent with a pharmaceutical company?

A) Low barriers to entry.
B) High levels of research and development.
C) Low profit margins.
D) Low business risk.

Question 14

On a common size basis, which of the following assets is normally largest for a commercial bank?

A) Accounts and Notes Receivable
B) Inventory
C) Property, Plant and Equipment
D) Cash and Marketable Securities

Question 15

Which of the following economic characteristics is consistent with a commercial bank?

A) Low barriers to entry.
B) High levels of research and development.
C) Low profit margin on lending activities.
D) Low profit margin on fee-based financial services, such as merger consulting.

Question 16

Which of the following would not appear as a liability on the balance sheet?

A) a labor contract
B) a note due to a bank
C) salary due employees at year-end
D) accounts payable

Question 17

Which of the following economic characteristics is consistent with a grocery store chain?

A) minimal competition
B) extensive competition
C) high net income to sales
D) differentiated product

Question 18

The tools for studying industry economics do not include

A) Value chain analysis
B) Classification using Porter's five forces
C) Classification of cash flows
D) Economic attributes framework

Question 19

When attempting to identify the economic characteristics of the industry in which a particular firm participates an analyst might ask which of the following questions?

A) Does technological change play an important role in the firm maintaining a competitive advantage?
B) Has the firm diversified across several geographic markets?
C) Has the firm recognized revenues at the proper time?
D) Has the firm structured transactions to make it look more profitable than economic conditions suggest?

Question 20

The second step in financial statement analysis is to identify the company strategy. Which of the following is a question an analyst should ask when performing a strategy analysis?

A) Are industry sales growing rapidly or slowly?
B) Do earnings include revenues that appear mismatched with the business model employed by the firm?
C) Does the industry include a large number of firms selling similar products?
D) What is the company's degree of geographical diversification?

Question 21

Which of the following would not inhibit new entrants into a market?

A) Existing technological expertise.
B) Large required capital investment.
C) Lack of rivalry among current participants.
D) Existing patented technology.

Question 22

When identifying the strategies that a particular firm pursues to gain a competitive advantage it is important to determine if its products are designed to meet the needs of a specific market segment or are they intended for a _____________________________________________.

Question 23

The fourth step in financial statement analysis is using the financial statements to analyze the current ____________________ and ____________________ of the firm.

Question 24

The ______________________________ sets forth the sequence of activities involved in the creation, manufacture and distribution of its products and services.

Question 25

Labor contracts and purchase order commitments are examples of ____________________ contracts.

Question 26

The tools of effective financial statement analysis are also useful for assessing whether to extend ____________________ to a firm, either for a short-term or for a long-term.

Question 27

Which of the following activities reported in the Statement of Cash Flows is a financing activity?

A) Repayment of outstanding debt.
B) Investing in equity securities of other companies.
C) Payment of dividends.
D) Issuing debt.

Question 28

The higher the value added from any activity, the higher should be the ____________________ from engaging in that activity.

Question 29

The threat of new entrants is measured by whether there are entry barriers, such as capital investment, ________________________________________, patents, or regulation that inhibit new entrants.

Question 30

Another important step in financial statement analysis is to assess the quality of a firm's ________________________________________ and if necessary adjust them for such characteristics as sustainability or comparability.

Question 31

Resources that have the potential for providing a firm with future economic benefits are called ____________________.

Question 32

Normally, intense rivalries have a tendency to reduce ____________________.

Question 33

Current assets are defined as

A) cash and cash equivalents.
B) all assets expected to be quickly used by the firm.
C) cash and other assets that the firm expects to sell or consume during the normal operating cycle of a business, usually one year.
D) cash and other assets that the firm expects maintain for a period including the normal operating cycle of a business, usually one year.

Question 34

____________________ assets include the rights established by law or contract to the future use of property.

Question 35

Assets that do not represent a claim to a fixed amount of cash are called ____________________ assets.

Question 36

Which of the following is not an expense of a business?

A) Depreciation
B) Dividends
C) Salaries
D) Advertising

Question 37

Obtaining a competitive advantage by being the first company to introduce new concepts or ideas is referred to as ________________________________________.

Question 38

The five economic attributes that are normally studied are demand, supply, manufacturing, ____________________ and investing and financing.

Question 39

Which of the following is not a characteristic of an extraordinary item?

A) Material in amount.
B) Nonrecurring.
C) Unusual given the nature of the firm's activities.
D) Requires a cash outflow.

Question 40

The first step in financial statement analysis is to identify the __________________________________________________ of the industry in which a firm participates.

Question 41

How easily can customers switch to substitute products is a question one might ask when assessing the ___________________________________.

Question 42

When assessing the threat of new entrants what questions might an analyst ask about an industry?

Question 43

What three financial statements are prepared by business firms and what information does each provide?

Question 44

The residual interest in a company is referred to as ______________________________.

Question 45

How easily can new firms enter a market is a question one might ask when assessing _____________________________________________.

Question 46

______________________________ relates to the relative number of buyers and sellers in a particular industry.

Question 47

___________________________________ financial statements are helpful in highlighting the relative magnitude of changes in financial statement data from year to year.

Question 48

What are the six interconnected activities related to financial statement analysis?

Question 49

Many people view the balance sheet as being a representation of a firm's economic position. What are some issues that reduce the quality of this representation?

Question 50

Statements that express all items in a particular financial statement as a percentage of some common base are called _________________________ statements.

Question 51

___________________________________ equals net income for a period plus or minus the changes in shareholders' equity accounts other than from net income and transactions with owners.

Question 52

Basic EPS is calculated as net income minus _____________________________________________ divided by the weighted average number of shares outstanding.

Question 53

Under the ____________________ basis of accounting, a firm recognizes revenue when it performs all or a substantial portion, of the services it expects to perform and receives either cash or a receivable.

Question 54

What is an industry's value chain?

Question 55

Nonmonetary assets include assets that are ____________________, such as inventories, and assets that are ____________________ such as brand names.

Question 56

Under the Sarbanes-Oxley Act ____________________ assumes responsibility for establishing and maintaining adequate internal control structure and procedures.

Question 57

Firms intending to issue new bonds or capital stock file a ____________________ with the SEC that describes the offering.

Question 58

Most financial statement analysis aims to assess a firm's ____________________ and ____________________.

Question 59

A firm obtains cash from short and long-term ____________________ and from issuing preferred and _________________________.

Question 60

The _____________________________________________ defines more clearly the explicit responsibility of managers for financial statements, the relation between the independent auditor and the firm audited and the kinds of services permitted and not permitted.

Question 61

What is the rationale for the statement of cash flows?

Question 62

Prepare an analysis of the automobile manufacturing industry using Porter's five forces framework. For each component force provide support for your conclusion. In addition, at the completion of your analysis provide a conclusion, along with support, of whether you expect the automobile industry to report high or low profitability in the near future.

Question 63

Many market participants argue that financial markets are efficient and that financial statement users cannot routinely analyze financial statements to find mispriced securities. This view would lead some to suggest that there is little value to financial statement analysis. Provide a discussion of the role of financial statement analysis in an efficient capital market and reasons why financial statement analysis is still valuable.

Question 64

What are three activities reported in the statement of cash flows and what information does each activity provide?

Question 65

What is comprehensive income?

Question 66

Under the Sarbanes-Oxley Act financial statements must include both a Management Assessment and an Assurance Opinion. What information do the Management Assessment and an Assurance Opinion provide to financial statement users?

Question 67

Prepare an analysis of the grocery industry using Porter's Five Forces framework. For each component force provide support for your conclusion. In addition, at the completion of your analysis provide a conclusion, along with support, of whether you expect the grocery industry to report high or low profitability in the near future.