Financial Statement Technique & Implementation

Questions

1. Sergey Martinenko is an investment analyst with Profis, Martinenko and Verona. He is

explaining to his new assistant, John Stevenson, why it is crucial for an investment analyst to
read the footnotes to a firm financial statement and the Management Discussion and Analysis
(MD&A) before making an investment decision. Which rationale is Martinenko least likely to
provide to Stevenson regarding the importance of analyzing the footnotes and MD&A?

A. Accruals, adjustments and assumptions are often explained in the footnotes and MD&A.
B. The footnotes disclose whether or not the company is adhering to GAAP.
C. Evaluating the footnotes helps the analyst assess whether management is manipulating
earnings.

2. The Management Discussion and Analysis (MD&A) portion of the financial statements:

A. includes such items as discontinued operations, extraordinary items, and other unusual or
infrequent events.
B. is not required by the SEC.
C. includes audited disclosures that help explain the information summarized in the financial
statements.

3. Which of the following is least likely to be considered a role of financial statement analysis?

A. To make economic decisions.

B. Assessing the management skill of the company executives.
C. Determining whether to invest in the company securities

4. Which of the following statements represents information at a specific point in time?

A. The balance sheet

B. The income statement and Balance sheet
C. Income Statement

5. Which of the following statements regarding footnotes to the financial statements is least
accurate?

A. Footnotes may contain information regarding contingent losses.

B. Footnotes provide information about assumptions and estimates used by management
C. Some supplementary schedules are audited whereas footnotes are not audited
6. The following amounts were drawn from the records of JME Company: total assets = $1,200;
total liabilities = $750; contributed capital = $600. Based on this information alone, retained
earnings must be equal to:

A) $150.
B) −$150.
C) $450.

7. Alpha Company reported the following financial statement information:

December 31, 2016:

Assets $70,000
Liabilities 45,000
December 31, 2017:
Assets 82,000
Liabilities 55,000
During 2017:
Stockholder investments 3,000
Net income ?
Dividends 6,000

Calculate Alpha net income for the year ended December 31, 2017 and the change in
stockholders equity for the year ended December 31, 2017.

Net Income Change In Equity

A. 5000 2000 Increase

B. -3000 2000 Increase
C. 5000 2000 Decrease

8. MSH Corporation uses gold to manufacture jewelry. MSH anticipates the need for gold on
June 30th for goods that will be sold on September 30th. Concerned that the price of gold will
increase, MSH purchases a futures contract and designates the contract as a cash flow hedge. As
it turns out, the spot price of gold was lower at the end of June when the contract was settled.
When should MSH recognize the loss on the futures contract in the income statement and should
the loss be included in income from continuing operations (IFCO)?

Date loss is Recognized Loss Included in IFCO

A. Sept 30th Yes

B. Sept 30th No
C. June 30th Yes
9. Assume that inventory costs are increasing in line with an overall inflation rate of 3 percent. If
a firm reports inventory using the last in, first out (LIFO) method, which of the following is most
accurate?

A) The less expensive inventory is flowing out to COGS.

B) Lower profits and lower taxes are reported because new inventory is flowing out to COGS.
C) LIFO reserve measures the accumulation of taxes paid.

10. Frank Brill, CFA, is concerned that Moses Aviation is overstating its profits. The best
indicator of such action would be Moses Aviation

A) sales-growth rate of nearly twice the industry average.

B) recognition of revenue from barter transactions.
C) rising inventory.

11. Star Chemical Inc. (SCI) reported the following year-end data:

Depreciation expense $25 million

Net income $35 million
Dividends $10 million
Total assets $250 million

Shareholder equity $195 million

Effective tax rate 35 percent

SCI also reported that it changed from an accelerated depreciation method to straight line
depreciation. The change resulted in a decrease in depreciation expense of $5 million.
Management felt that the change would not have a material effect on financial performance
measures.Ignoring deferred taxes, what are the return on assets (ROA) and return on equity
(ROE) measures under the old depreciation methods?

A) ROA is 13.30% and ROE is 17.05%.

B) ROA is 12.96% and ROE is 16.56%.
C) ROA is 13.50% and ROE is 17.51%.
12. Express Delivery Inc. (EDI) reported the following year-end data:

Depreciation expense $30 million

Net income $30 million
Total assets $535 million
Shareholder’s equity $150 million
Effective tax rate 35 percent
Last year EDI purchased a fleet of delivery vehicles for $140 million. For the first year, straight-
line depreciation was used assuming a depreciable life of 7 years with no salvage value.
However, at year-end EDI management determined that assumptions of a useful life of 5 years
with a salvage value of 10 percent of the original value were more appropriate. How would the
return on assets (ROA) and return on equity (ROE) for last year change due to the change in
depreciation assumptions? ROA and ROE would be closest to:

A) ROA 5.7% and ROE 19.5%.

B) ROA 5.0% and ROE 18.2%.
C) ROA 5.3% and ROE 20.5%.

13. Charger Corporation offers extended payment terms to its customers. In order to finance its
accounts receivable, Charger is considering two alternatives. The first alternative is to borrow
against the receivables. The second alternative is to securitize the receivables through a special
purpose entity. Which alternative would result in lower operating cash flow and lower financing
cash flow?

Lower operation Cash flow if they go for……………….

Lower Financing Cash Flow if they go for………………

14. Which of the following statements about operating income and operating cash flow is most
accurate?

A) Operating income is more reliable than operating cash flow because of the judgments and
estimates involved with accrual accounting.
B) Operating income is confirmed by operating cash flow when the growth rates of the two
measures are relatively stable over time.
C) Operating cash flow usually increases faster than operating income when the firm is growing.
15. Due to a change in accounting standards, TRK Construction QSPE must now be
consolidated. The QSPE has purchased, TRK's accounts receivables and had financed those with
notes payables. Assume that TRK's current ratio before consolidation is 1.10. Consolidation will
most likely result in which of the following:

A) an increase in the current ratio.

B) a decrease in the current ratio.
C) no change in the current ratio.

16. A firm has reported net income of $136 million, but the notes to financial statements includes
a statement that the results include a $27 million charge for non-insured earthquake damage• and
a gain on the sale of certain assets during restructuring of $16 million. If we assume that both of
these items are given on a pre-tax basis and the effective tax rate is 36%, what would be the
normal income"?

A) $94.08 million.
B) $147.00 million.
C) $143.04 million.
.