Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
1) In the United States, publicly traded companies can choose whether or not they wish to release periodic
financial statements.
2) Financial statements are accounting reports issued periodically by a firm which 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.
3) International Financial Reporting Standards are taking root throughout the world. However, it is unlikely
that the U.S. will report according to IFRS before the second half of the twenty–first century.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
4) 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.
5) 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
6) The exchanges in which of the following countries or regions do NOT accept the International Financial
Reporting Standards set out by the International Accounting Standards Board?
A) Germany
B) France
C) United States
D) United Kingdom
7) Which of the following is NOT one of the financial statements that must be produced by a public company?
A) the balance sheet
B) the income statement
C) the statement of cash flows
D) the statement of activities
8) U.S. public companies are required to file their annual financial statements with the U.S. Securities and
Exchange Commission on which form?
A) 10–A
B) 10–K
C) 10–Q
D) 10–SEC
9) Which of the following is NOT a financial statement that every public company is required to produce?
A) income statement
B) statement of sources and uses of cash
C) balance sheet
D) statement of stockholders’ equity
10) 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) NYSE Enforcement Board.
B) Accounting Standards Board.
C) Securities and Exchange Commission (SEC).
D) auditor.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
11) What is the role of an auditor in financial statement analysis?
12) What are the four financial statements that all public companies must produce?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
13) The balance sheet shows the assets, liabilities, and stockholders’ equity of a firm over a given length of time.
14) Stockholders’ equity is the difference between a firm’s assets and liabilities, as shown on the balance sheet.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
15) Which of the following amounts would NOT be included on the right side of a balance sheet?
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
16) Which of the following best describes why the left and right sides of a balance sheet 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.
17) 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?
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
18) A delivery company is creating a balance sheet. Which of the following would most likely be considered a
short–term liability on this balance sheet?
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
19) A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following
statements about that company are 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.
20) What is the main problem in using a balance sheet 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 balance sheet.
B) The balance sheet does not accurately represent the book value of assets held by the company.
C) The equity shown on the balance sheet 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.
21) The major components of stockholders’ 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
Use the table for the question(s) below.
Balance Sheet
Assets Liabilities
Current Assets Current Liabilities
Cash 50 Accounts payable 42
Accounts receivable 22 Notes payable/short–term debt 7
Inventories 17
Total current assets 89 Total current liabilities 49
Long–Term Assets Long–Term Liabilities
Net property, plant,
and equipment 121 Long–term debt 128
Total long–term assets 121 Total long–term liabilities 128
Total Liabilities 177
Stockholders’ Equity 33
Total Assets 210 Total Liabilities and 210
Stockholders’ Equity
22) The above diagram shows a balance sheet 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
23) 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?
A) $7 million
B) $32 million
C) $33 million
D) $40 million
24) The above diagram shows a balance sheet for a certain company. If the company buys new property, plant
and equipment today using its entire cash balance, what will its net working capital be?
A) –$10 million
B) $10 million
C) –$3 million
D) $40 million
25) The above diagram shows a balance sheet 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
be adjusted accordingly.
D) Long–Term Liabilities would fall to $172 million, and Total Liabilities and Stockholders’ Equity would
be adjusted accordingly.
26) The above diagram shows a balance sheet 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.
27) Which of the following balance sheet equations is INCORRECT?
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
28) Cash is a
A) Long–Term Asset.
B) Current Asset.
C) Current Liability.
D) Long–Term Liability.
29) Accounts payable is a
A) Long–Term Liability.
B) Current Asset.
C) Long–Term Asset.
D) Current Liability.
30) A 30–year mortgage loan is a
A) Long–Term Liability.
B) Current Liability.
C) Current Asset.
D) Long–Term Asset.
31) Which of the following statements regarding the balance sheet is INCORRECT?
A) The balance sheet provides a snapshot of the firm’s financial position at a given point in time.
B) The balance sheet lists the firm’s assets and liabilities.
C) The balance sheet reports stockholders’ equity on the right–hand side.
D) The balance sheet reports liabilities on the left–hand side.
Use the table for the question(s) below.
Luther Corporation
Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions)
Assets
2006
2005
Liabilities and
Stockholders’ Equity
2006
2005
Current Assets
Current Liabilities
Cash
63.6
58.5
Accounts payable
87.6
73.5
Accounts receivable
55.5
39.6
Notes payable /
short–term debt
10.5
9.6
Inventories
45.9
42.9
Current maturities of
long–term debt
39.9
36.9
Other current assets
6.0
3.0
Other current liabilities
6.0
12.0
Total current assets
171.0
144.0
Total current liabilities
144.0
132.0
Long–Term Assets
Long–Term Liabilities
Land
66.6
62.1
Long–term debt
239.7
168.9
Buildings
109.5
91.5
Capital lease obligations
—
—
Equipment
119.1
99.6
Total Debt
239.7
168.9
Less accumulated
depreciation
(56.1)
(52.5)
Deferred taxes
22.8
22.2
Net property, plant, and
equipment
239.1
200.7
Other long–term liabilities
—
—
Goodwill
60.0
—
Total long–term liabilities
262.5
191.1
Other long–term assets
63.0
42.0
Total liabilities
406.5
323.1
Total long–term assets
362.1
242.7
Stockholders’ Equity
126.6
63.6
Total Assets
533.1
386.7
Total liabilities and
Stockholders’ Equity
533.1
386.7
32) Refer to the balance sheet above. What is Luther’s net working capital in 2005?
A) $12 million
B) $27 million
C) $39 million
D) $63.6 million
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
33) In general, a successful firm will have a market–to–book ratio that is substantially greater than 1.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Use the table for the question(s) below.
Luther Corporation
Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions)
Assets
2006
2005
Liabilities and
Stockholders’ Equity
2006
2005
Current Assets
Current Liabilities
Cash
63.6
58.5
Accounts payable
87.6
73.5
Accounts receivable
55.5
39.6
Notes payable /
short–term debt
10.5
9.6
Inventories
45.9
42.9
Current maturities of
long–term debt
39.9
36.9
Other current assets
6.0
3.0
Other current liabilities
6.0
12.0
Total current assets
171.0
144.0
Total current liabilities
144.0
132.0
Long–Term Assets
Long–Term Liabilities
Land
66.6
62.1
Long–term debt
239.7
168.9
Buildings
109.5
91.5
Capital lease obligations
—
—
Equipment
119.1
99.6
Total Debt
239.7
168.9
Less accumulated
depreciation
(56.1)
(52.5)
Deferred taxes
22.8
22.2
Net property, plant, and
equipment
239.1
200.7
Other long–term liabilities
—
—
Goodwill
60.0
—
Total long–term liabilities
262.5
191.1
Other long–term assets
63.0
42.0
Total liabilities
406.5
323.1
Total long–term assets
362.1
242.7
Stockholders’ Equity
126.6
63.6
Total Assets
533.1
386.7
Total liabilities and
Stockholders’ Equity
533.1
386.7
34) Refer to the balance sheet above. If in 2006 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
35) Refer to the balance sheet above. When using the book value of equity, the debt–equity ratio for Luther in
2006 is closest to:
A) 2.21
B) 2.29
C) 2.98
D) 3.03
36) Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are
trading at $16 per share, then using the market value of equity, the debt–equity ratio for Luther in 2006 is
closest to:
A) 1.71
B) 1.78
C) 2.31
D) 2.35
37) Refer to the balance sheet above. If in 2006 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
38) Refer to the balance sheet above. Luther’s current ratio for 2006 is closest to:
A) 0.84
B) 0.87
C) 1.15
D) 1.19
39) Refer to the balance sheet above. Luther’s quick ratio for 2005 is closest to:
A) 0.77
B) 1.31
C) 1.09
D) 0.92
40) Refer to the balance sheet above. The change in Luther’s quick ratio from 2005 to 2006 is closest to:
A) a decrease of 0.10
B) an increase of 0.10
C) a decrease of 0.15
D) an increase of 0.15
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
41) Refer to the 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?
42) Refer to the balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at
$15 per share, then what is Luther’s enterprise value?
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
43) 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 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.
44) GenCorp has a total debt of $140 million and stockholders’ equity of $50 million. It also has 25 million
shares outstanding, with a market price of $3.50 per share. What is GenCorp’s market debt–equity ratio?
A) 0.36
B) 0.63
C) 1.02
D) 1.60
45) A company has a share price of $24.50 and $118 million shares outstanding. Its market–to–book ratio is 4.2, its
book debt–equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this
business assuming you pay its enterprise value?
A) $1.5
B) $2.8 billion
C) $3.6 billion
D) $4.2 billion
46) Convex Industries has inventories of $200 million, current assets of $1.4 billion, and current liabilities of $530
million. What is its quick ratio?
A) 0.38
B) 0.44
C) 2.12
D) 2.26
47) Which ratio would you use to measure the financial health of a firm by assessing that firm’s leverage?
A) debt–equity or equity multiplier ratio
B) market–to–book ratio
C) market debt–equity ratio
D) current or quick ratio
48) Company A has current assets of $42 billion and current liabilities of $31 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?
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.
Use the table for the question(s) below.
Balance Sheet
Assets 2007 2008 Liabilities 2007 2008
Current Assets Current Liabilities
Cash 50 46 Accounts payable 42 48
Accounts receivable 22 12 Notes payable/short–term debt 7 5
Inventories 17 38
Total current assets 89 96 Total current liabilities 49 53
Long–Term Assets Long–Term Liabilities
Net property, plant,
and equipment 121 116 Long–term debt 128 136
Total long–term assets 121 116 Total long–term liabilities 128 136
Total Liabilities 177 189
Stockholders’ Equity 33 23
Total Assets 210 212 Total Liabilities and 210 212
Stockholders’ Equity
49) If the above balance sheet is for a retail company, what indications about this company would best be drawn
from the changes in the balance sheet between 2007 and 2008?
A) The company is having difficulties selling its product.
B) The company has reduced its debt.
C) The company has added a major new asset in terms of plant and equipment.
D) The company has experienced a significant rise in its market value.
50) If the above balance sheet is for a retail company, what indications about this company would best be drawn
from the changes in stockholders’ equity between 2007 and 2008?
A) The company is very profitable because it is obviously collecting receivables faster.
B) The company is selling its property, plant and equipment, which may result in a long–term deficiency
in production capacity.
C) The company’s net income in 2008 was negative.
D) No conclusions can be drawn regarding stockholders’ equity without additional information.
51) If the above balance sheet is for a retail company, what indications about this company would best be drawn
from the changes in quick ratio between 2007 and 2008?
A) The company has eliminated the risk that it will experience a cash shortfall in the near future.
B) The company has reduced the risk that it will experience a cash shortfall in the near future.
C) The risk that the company will experience a cash shortfall in the near future is unchanged.
D) The company has increased the risk that it will experience a cash shortfall in the near future.
52) If the above balance sheet is for a retail company, how has the company’s leverage changed between 2007
and 2008?
A) The company has experienced a very significant decrease in its leverage.
B) The company has experienced a significant decrease in its leverage.
C) The company has experienced no significant change in its leverage.
D) The company has experienced a significant increase in its leverage.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
53) How does a firm select the date for preparation of its balance sheet?
54) What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
55) The income statement reports the firm’s revenues and expenses, and it computes the firm’s bottom line of net
income, or earnings.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
56) What is a firm’s net income?
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