The SEC regulates U.S. companies that issue securities to the public and requires the
issuance of a prospectus for any new security offering.
Information that is significant enough to make a difference in a decision is considered
to be immaterial.
Companies that use IFRS may switch the order of presentation of assets and liabilities,
listing noncurrent items before current items.
The European Union began requiring publicly traded companies to use U.S. GAAP in
2005.
The valuation of marketable securities on the balance sheet requires the separation of
investment securities into three categories: held to maturity, trading securities, and
securities available for sale.
The balance sheet is also called the statement of condition or statement of financial
position.
As part of an integrated disclosure system required by the SEC, the information
presented in annual reports includes three-year audited balance sheets.
A common-size balance sheet is useful to the analyst because it facilitates the structural
analysis of the firm.
Working capital refers to the investment in property, plant and equipment.
Retained earnings is the unused stash of cash that a firm has accumulated since
inception.
External auditors are required to audit the internal control assessment of the company as
well as the financial statements.
Tools used in a financial statement analysis should generally include common-size
financial statements, key financial ratios, trend analysis, structural analysis, and
comparison with industry competitors.
The balance sheet is prepared for a period of time, generally a year.
What information would not be found in a firm’s annual report?
a. Notes to the financial statements.
b. Financial Reporting Rulings.
c. Auditor’s report.
d. High and low stock prices.
What is implied if the inventory account has increased?
a. Cash flow from financing activities has decreased relative to net income.
b. Cash flow from operating activities has increased relative to net income.
c. Cash flow from operating activities has decreased relative to net income.
d. Cash flow from financing activities has increased relative to net income.
Which of the following accounts could be categorized as either a current or noncurrent
liability depending on date the debt is due?
a. Notes payable and deferred taxes.
b. Accounts payable and current portion of long-term debt.
c. Deferred taxes and mortgages due in 30 years.
d. Long-term warranties and accounts payable.
Wilcox’s effective tax rate is:
a. 24.67%
b. 27.36%
c. 35.00%
d. 35.56%
Which of the following is an acceptable method to report total comprehensive income?
a. On the face of the balance sheet.
b. Total comprehensive income does not have to be reported.
c. In the operating section of the cash flow statement.
d. In the statement of stockholders’ equity.
Which item is not a special item that must be disclosed separately on the income
statement?
a. Extraordinary gain.
b. Extraordinary loss.
c. Foreign currency translation adjustments.
d. Discontinued operations.
Which of the following statements is true?
a. It is unnecessary to analyze operating expenses over which management exercises
discretion.
b. Impairment charges do not need to be analyzed since they are generally a
non-recurring expense.
c. A good way to improve operating profit is to cut repairs and maintenance costs as
much as possible.
d. Operating expenses can be easily analyzed by preparing a common-size income
statement.
What is the change in cash for Armstrong Company?
a. $315
b. $565
c. $425
d. $215
How are deferred taxes recorded on the balance sheet?
a. As current or noncurrent liabilities.
b. As stockholders’ equity.
c. As noncurrent assets or noncurrent liabilities.
d. As current or noncurrent assets or liabilities.
Which ratios measure the extent of a firm’s financing with debt relative to equity and its
ability to cover interest and fixed charges?
a. Debt ratio and price-to-earnings ratio.
b. Cash flow adequacy and fixed charge coverage.
c. Days payable outstanding and gross profit margin.
d. Cash interest coverage and average collection period.
The Management Discussion and Analysis is of potential interest to the analyst because
it contains information that cannot be found in the financial data.
Which of the following statements is true?
a. The straight-line method of depreciation allocates a decreasing amount of
depreciation expense each year.
b. Straight-line depreciation is the least used method for financial reporting purposes.
c. Fixed assets are reported at historical cost less accumulated depreciation on the
balance sheet.
d. The total amount of depreciation over the asset’s life is larger when using an
accelerated method of depreciation.
How is the statement of cash flows connected to the balance sheet?
a. The statement of cash flows shows changes in the asset and liability accounts to
explain cash from operating activities.
b. The changes in all revenue and expense accounts are calculated and then listed as
cash inflows or outflows.
c. The changes in all of the balance sheet accounts are calculated and then listed as
inflows or outflows, except for cash.
d. Changes in asset accounts are recorded as operating activities, changes in liability
accounts are recorded as financing activities and changes in equity accounts are
recorded as investing activities.
Which of the following accounts would be classified as current assets on the balance
sheet?
a. Accounts receivable, inventory, cash equivalents.
b. Marketable securities, accounts payable, property, plant and equipment.
c. Prepaid expenses, goodwill, long-term investments.
d. Property, plant and equipment, inventory, goodwill.
What basic financial statements can be found in a corporate annual report?
a. Balance sheet, income statement, statement of shareholders’ equity, and statement of
cash flows.
b. Balance sheet, auditor’s report and income statement.
c. Earnings statement and statement of retained earnings.
d. Statement of cash flows and five-year summary of key financial data.
ABC Company purchases five products for sale in the order and at the costs shown:
Assume ABC uses the average cost method of inventory valuation. What unit cost
would be used to determine the amount in ending inventory or cost of goods sold?
a. $12.67
b. $13.60
c. $15.00
d. $13.00
The accounts receivable turnover, inventory turnover and accounts payable turnover
ratios are mathematical complements to the ratios that make up the cash conversion
cycle.
Prepare the statement of cash flows for Franklin Company using the indirect method.
Define current assets and current liabilities and give two examples of each.
Two other terms used interchangeably with income are and .
A change in the retained earnings account is the result of the
for the period and the payment of .
Insert the word ‘added’ or ‘subtracted’ in the blank.
A decrease in accounts receivable should be to convert net income to cash flow from
operating activities.
Explain the format and key components of a balance sheet prepared in the U.S. or
overseas.