Part 2 Financial Analysis Tools
CHAPTER 3
FINANCIAL STATEMENTS
CHAPTER LEARNING OBJECTIVES
3.1 Define what International Financial Reporting Standards (IFRS) are and state their
3.2 Organize a firm’s transactions and explain what are the most important
3.3 Prepare a firm’s financial statements.
3.4 Analyze a firm’s financial statements.
Financial Analysis Tools 3 – 2
MULTIPLE CHOICE QUESTIONS
1. Which accounting standards would be used by a publicly traded Canadian company
that is not inter-listed?
a) IFRS
b) US GAAP
c) ASPE
d) Pension Accounting
2. The CPA Canada Handbook contains the accounting principles of:
a) The United States
b) Canada
c) The European Community
d) Ontario
3. The IASB located in London is responsible for harmonizing accounting principles in:
a) US only
b) European Union
c) Developed countries
d) World countries
Test Bank 3 Chapter 3
4. The shares of Tremblay Maple Syrup Company are listed on both the Toronto and
New York stock exchanges. Tremblay could prepare its financial statements in
accordance with:
I. ASPE
II. US GAAP
III. IFRS
a) I only
b) II only
c) I and III only
d) II and III
5. Which one of the following is a misrepresentation of financial statements?
a) The statements deceive investors.
b) The statements overstate earnings and inflate the value of assets.
c) The statements mislead analysts in estimating the market value of the firm.
d) All of the above.
6. Which one of the following is not true?
a) Accounting standards evolve to improve the representation of financial statements.
Financial Analysis Tools 3 – 4
b) Accounting scandals introduced lower accounting standards.
c) There is more and more collaboration between different countries to harmonize
accounting standards.
d) IASB is working with different accounting boards to harmonize worldwide standards.
7. The Sarbanes-Oxley Act (SOX) requirements include:
I. An audit committee made up of independent directors
II. A separation of audit and consulting functions
III. A certification of financial statements by the CEO and CFO
a) I and II only
b) I and III only
c) III only
d) I, II, and III
8. “Debiting” an account
I. increases an asset account.
II. increases a liability account.
III. increases an equity account.
a) I only
b) II only
c) I or II only
d) II or III only
Test Bank 5 Chapter 3
9. Which of the following properly orders the list of balance sheet items, from top to
bottom?
a) Cash, Inventory, Factory
b) Cash, Factory, Inventory
c) Payable, Long-term Debt, Short-term Debt
d) Inventory, Receivables, Owner’s Equity
10. The balance sheet can be best described as:
a) a snapshot taken at a single point of time
b) the accumulated result of multiple transactions
c) a representation of a firm’s financial position
d) all of the above
11. “Crediting” an account
I. increases an asset account.
II. increases a liability account.
III. could increase both an equity account and a liability account.
a) I only
b) II only
c) I and II only
d) II and III only
Financial Analysis Tools 3 – 6
12. You bought a sanding machine from the local hardware store using the credit card
of the store chain on December 30, 2015 to be delivered on January 10, 2016. When is
the sale recognized?
a) When the payment is made to the card
b) When you receive the machine on Jan. 10
c) When you made the purchase on Dec. 30
d) When the credit card company makes the payment to the store
13. The basic principles of GAAP do not include:
a) The entity concept
b) Liquidation valuation
c) The matching principle
d) Revenue recognition
14. You own a small business and you decide to purchase insurance for your business
on March 31 that covers a 12-month period beginning the next day. The insurance
3 – 7 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition
Test Bank 7 Chapter 3
company requires the annual premium amount upfront. On December 31, what portion
of the premium should you expense in your financial statements?
a) 100%
b) 75%
c) 67%
d) 33%
15. On January 15, 2014, the Dam-M-Up Company entered into an agreement with
Quebec Hydro to build a dam in northern Quebec. Construction will begin on January 1,
2015 and will be completed by December 15, 2016. According to the matching principle,
when should the revenue from this project be recognized?
a) January 15, 2014 (when the contract is signed)
b) As the work is carried out (2015 and 2016)
c) When the work is completed
d) When payment is received
16. Which of the following statements is not correct?
a) The cash flow statement is a summary of the firm’s cash receipts and disbursements
over a specified period.
b) Traditional cash flow equals net income plus cash expenses.
c) Cash flow from operations equals traditional cash flow less the increase in net
working capital.
d) Free cash flow equals cash flow from operations less capital expenditures.
17. Which of the following is not a source of cash?
a) Increase in owners’ equity
b) Increase in accounts payable
c) Decrease in accounts receivable
d) Increase in inventory
18. Assume the following information from the financial statements of ReStateM
Company:
Net income $10,000
Depreciation $3,000
Salaries $5,000
Deferred income taxes $2,000
Change in accounts receivable $4,000
Change in accounts payable –$5,000
Change in inventory –$2,000
Capital expenditures $1,500
The traditional cash flow for ReStateM Company is:
a) $13,000
b) $8,000
c) $15,000
d) $10,000
Test Bank 9 Chapter 3
19. Assume the following information from the financial statements of ReStateM
Company:
Net income $10,000
Depreciation $3,000
Salaries $5,000
Deferred income taxes $2,000
Change in accounts receivable $4,000
Change in accounts payable –$5,000
Change in inventory –$2,000
Capital expenditures $4,000
The change in net working capital for ReStateM Company is:
a) Increase $7,000
b) Decrease $7,000
c) Increase $2,000
d) Decrease $2,000
20. Assume the following information from the financial statements of ReStateM
Company:
Net income $10,000
Depreciation $2,000
Salaries $5,000
Deferred income taxes $1,000
Change in accounts receivable $2,000
Change in accounts payable –$3,000
Change in inventory –$4,000
Capital expenditures $5,000
The change in net working capital for ReStateM Company is:
a) Increase $7,000
b) Decrease $7,000
c) Increase $1,000
d) Decrease $1,000
21. Assume the following information from the financial statements of ReStateM
Company:
Net income $10,000
Depreciation $3,000
Salaries $5,000
Increase in net working capital $9,000
Capital expenditures $4,000
The cash flow from operations for ReStateM is:
a) $22,000
b) –$22,000
c) $4,000
d) –$4,000
22. Assume the following information from the financial statements of ReStateM
Company:
Net income $10,000
Depreciation $3,000
Salaries $5,000
Increase in net working capital $9,000
Capital expenditures $2,000
The free cash flow for ReStateM is:
a) $24,000
b) $20,000
c) $6,000
d) $2,000
Test Bank 11 Chapter 3
23. Assume the following information from the financial statements of ReStateM
Company:
Net income $12,000
Depreciation $2,000
Salaries $5,000
Increase in net working capital $9,000
Capital expenditures $2,000
The free cash flow for ReStateM is:
a) $14,000
b) $5,000
c) $12,000
d) $3,000
24. What is the difference between current and non-current liabilities?
a) current liabilities are due to be paid within a year, while non-current liabilities are dure
more than a year into the future
b) current liabilities arose within the past year, while non-current liabilities arose more
than a year ago
c) current liabilities are known to exist right now, while non-current liabilities will not be
known until some time in the future
d) current liabilities are payable on specific due dates, while non-current liabilities can
be repaid at any
25. Why can there be a substantial difference between net income and free cash flow?
a) Capital expenditures are not fully included in the net income calculation.
b) Free cash flow includes accrual items not found in net income.
c) Free cash flow does not deduct the same expense items as net income.
d) Net income only flows to retained earnings, while free cash flow can be used to pay
dividends.
26. The consolidated financial statements of XYZ indicate minority interest of $10,000.
The total owners’ equity is $50,000. The minority interest value reflects:
a) The fraction of the other company’s equity that is owned by visible minorities
b) The fraction of the other company’s equity that is held by small shareholders
c) The fraction of the other company’s equity that is not owned by XYZ’s shareholders
d) The fraction of the other company’s equity that has been authorized but not yet
issued
27. Why is there a difference between earnings and cash flows?
a) Because of accruals and non-cash items.
b) Because of the difference in accounting methods.
c) Because cash flow statements and income statements follow different GAAP.
d) Because expenses are not accounted for the same way as revenues.
Test Bank 13 Chapter 3
28. Frank lives and works in Alberta and earned $50,000 in income. Percival lives and
works in Nova Scotia and also earned $50,000 income. If the only difference between
the two people is where they live, then
a) Frank and Percival will have the same total income tax bill.
b) Frank and Percival will have the same Federal income tax bill.
c) Frank and Percival will have the same Provincial income tax bill.
d) Where they live has no impact on their income tax bill.
29. Which of the following statements is true about personal taxes in Canada?
a) Individual and corporate marginal tax rates are the same.
b) Capital gains and interest income are taxed at the same rate for individuals.
c) Dividends received from Canadian corporations are taxed differently than dividends
received from US corporations.
d) Capital losses occur when a depreciable asset is sold below its original purchase
price.
30. Which of the following best describes double taxation?
a) Both the provincial and federal levels of government collect tax on an income
amount.
b) The taxable amount is collected at two different points in any given year.
c) Different levels of government use two different tax brackets.
d) Income that is taxed at the corporate level and then again at the personal level when
the corporation pays a dividend.