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th
Analysis of Financial Statements
Objective type Questions(Final)
1.
The statement of cash flow is segregated into three categories: a) Operating, Financing, Investing b) Operating, Financing, Managing c) Investing, Operating, Accounting d) Financing, Managing, Auditing
2.
The statement of cash flow explains changes in _____ by listing the activities that increased and decreased cash. a) Current Asset b) Current Liabilities c) Cash d) Fixed Asset
3.
The statement of cash flow can be prepared by using either the “direct method” or ______. a) Indirect Method b) Current Method c) Non current Method d) None of the above
4.
Under direct method, _________ cash flows are reported by major classes of operating cash receipts and payments. a) Financing b) Operating c) Investing d) None of the above
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5.
For a healthy growing firm generally __________ cash flows from operating activities are expected. a) Negative b) Positive c) Null d) None of the above
6.
A summary of a firm’s changes in financial position from one period to another, it is called _____. a) Sources b) Resources c) Uses d) Funds
7.
The flow of funds statement portrays net rather than ___________ changes between two comparable balance sheets at different dates. a) Operating b) Gross c) Financial d) Investing
8.
Any decrease in asset item represents a) Uses of funds b) Sources of funds c) Both a and b d) None of the above
9.
An increase in account receivables would be a __________. a) Use of funds b) Reuse of funds c) Sources of funds d) Both a and c
10.
_______ is a bookkeeping entry that allocates the cost of assets against income but does not involve any movement of capital. a) Depletion b) Amortization c) Depreciation
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11.
Deferred taxes an item that often appear in the long term ………………… portion of a firm’s balance sheet. a) Assets b) owner’s equity c) liability d) current assets
12.
Deferred taxes most commonly arises when a firm determines ……………….. Expenses in its published financial statement on a different basis then in its tax return. a) Direct expense b) depreciation c) indirect expense d) tax expense
13.
Most likely a company chooses ……………… depreciation method for its published income statement. a) MACRS b) simple method c) straight line method d) double decline method
14.
For tax purpose company uses the …………………… depreciation method. a) MACRS b) simple method c) straight line method d) double decline
15.
There are …………. Methods of depreciation. a) 2 b) 3 c) 4 d) 5
16.
If the firm continues to invest in depreciable assets payment of …………….. may continue to be delayed indefinitely.
a) Income tax b) tax c) deferred tax d) operating expenses
17.
The current period’s deferred tax expense is ……………… to net income. a) Subtract b) added back c) equal
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18.
Profits were understated because taxes were in fact …………….. a) Overstated b) understated c) equal
b&c
19.
a) b)
c)
d)
20.
By analyzing ________ ratio, we know the reason of growing inventory and receivables. a) Activity b) Profitability c) Market d) Liquidity
21.
An analysis of percentage of financial statements where all the balance sheet items are divided by total assets and all income statement items are divided by net sales and revenue, is called a) Trend analysis b) Common size analysis c) Vertical analysis d) Index analysis
22.
An analysis of percentage of financial statements where all the balance sheet or income statement figures for a base year equals 100. a) Trend analysis b) Common size analysis c) Vertical analysis d) Index analysis
23.
______________ gives us the information on magnitude of absolute change in profits and expenses. a) Indexed statement b) Common sized statement c) Divisional statement d) Income statement
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24.
Common size and index analysis becomes much easier when computer spread sheet program i.e. ____________ is used. a) PowerPoint b) Word c) Excel d) Outlook
25.
Which of the following would be considered a use of funds? a) a decrease in accounts receivable. b) a decrease in cash. c) an increase in account payable. d) an increase in cash.
26.
Which of the following is NOT a cash outflow for the firm? a) depreciation. b) dividends. c) interest payments. d) taxes.
27.
An examination of the sources and uses of funds statement is part of: a) A forecasting technique. b) A funds flow analysis. c) A ratio analysis. d) Calculations for preparing the balance sheet.
28.
Which of the following would be included in a cash budget? a) depreciation charges. b) dividends. c) goodwill. d) patent amortization.
29.
Uses of funds include a (an): a) decrease in cash. b) increase in any liability. c) increase in fixed assets.
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30.
According to the Financial Accounting Standards Board (FASB), which of the following is a cash flow from a "financing" activity? a) cash outflow to the government for taxes. b) cash outflow to shareholders as dividends. c) cash outflow to lenders as interest. d) cash outflow to purchase bonds issued by another company.
31.
_________ provides a financial summary of the firm’s operating results during a specified period. a) Balance sheet b) Income statement c) Cash flow statement d) Statement of retained earning
32.
Firm’s financial position at a given point in time is stated in ________. a) Balance sheet b) Income statement c) Capital budgeting d) None of the above
33.
The times interest earned ratio, sometimes also called the________________. a) Total Asset Turnover b) Average Payment Period c) Fixed-Payment Coverage Ratio d) Interest coverage ratio
34.
A popular tool for evaluating profitability in relation to sales is the _________________. a) Liquidity Ratios b) Common-size income statement c) Quick Ratio d) Cash Ratio
35.
Which of the following three is not frequently cited ratio of profitability that can be read directly from the common-size income statement? a) Gross profit margin, b) Operating profit margin, c) Net profit margin d) Return on Total Assets
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1.
The only difference between the direct and indirect method of presentation concerns the reporting of operating activities; the investing and financing activity section would be identical under each method. T
2.
Each activity of cash inflow or outflow is segregated according to one of four broad categories. F
3.
A major benefit of the statement of cash flow is that user gets a reasonably detailed picture of company’s operating, investing and financing transactions involving cash. T
4.
For a healthy growing firm negative cash flow from operating activities is generally expected. F
5.
The three part breakdown of cash flow aids the user in assessing the company’s current and potential future strengths and weaknesses. T
6.
Accountants create a deferred tax account in the long term liability section of the balance sheet to maintain a running total of differences between taxes reported and taxes actually due. T
7.
Deferred taxes appear in income statement.
F
8.
Deferred tax arises when a firm determines its depreciation expenses. T
9.
MACRS stands for modern accelerated cost recovery method. F
10.
Deferred tax account creates in the long term liability section of balance sheet. T
11.
Deferred tax account will need to be increase to keep balance sheet in balance. F
12.
The deferred taxes reported on the firm’s balance sheet are added to equity.
T
13.
The deferred taxes on the firm’s balance sheet are subtracted from net current assets.
F
14.
Liquidity ratio tells about power on stakeholder’s book value investment. (false)
15.
Common size and index analysis becomes much complex when computer spread sheet program is used. (false)
16.
Indexed statement gives us the information on magnitude of absolute change in profits and expenses. (true)
17.
By analyzing profitability ratio, we know the reason of growing inventory and receivables
(false)
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18.
An analysis of percentage of financial statements where all the balance sheet or income statement figures for a base year equals 100 is called Index analysis. (True)
19.
In sources of funds, there is decrease in an asset item. (true)
20.
In uses of funds, there is increase in the claim items. (false)
21.
Funds provided by operations are usually not expressed directly on income statement. (true)
22.
Once depreciation is added to the funds statement as a source, we can remove change in net fixed assets. (true)
23.
A forecast of a firm’s future cash flows arising from collection and disbursements on monthly basis is called cash budget. (true)
24.
The liquidity of a firm is measured by its ability to satisfy its short-term obligations as they come due. T /F
25.
Generally, the higher the current ratio, the less liquid the firm is considered to be. T/ F
26.
Financial leverage is the magnification of risk and return introduced through the use of fixedcost financing, such as debt and preferred stock.
T /F
27.
Operating profits are “pure” because they measure only the profits earned on operations and ignore interest, taxes, and preferred stock dividends. T
28.
Balance sheet differs from other financial statements because it is the only one that reflects a single point in time. T /F
29.
Balance sheet differs from other financial statements because i t is the only one which has enough information to construct other financial statements. T/ F
30.
A balance sheet is called a balance sheet because the amount of Assets should not equal to the sum of amounts of Liabilities and Equity. T/ F
31.
Statement of retained earnings reports on a business’s profit and loss from operations over a given period of time. T/ F
32.
With a beginning balance sheet and other statement, you have enough information to build an ending balance sheet for any period of time. T /F
33.
The Cash flow statement shows the changes in the owner’s equity in a business over a given period of time by highlighting the equity positions at the beginning and end of the reporting period. T /F
34.
Merchant bankers use financial statement analysis to identify target companies for their clients. T /F
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35.
Market value forms the benchmark in negotiating price with the companies for their clients.
T/ F
1.
Explain briefly the implications of funds statement analysis?
Ans: page 176
2.
Write the four decisions managers can take with the help of cash flow statement?
Ans: page 177
3.
Write down 2 cash inflow and 2 cash outflow arising from operating activities?
Ans : page178 table 7.4
4.
What type of cash flow pattern a healthy firm should generally expect?
Ans: page 181
5.
Write down 2 cash inflow and 2 cash outflow arising from financing activities?
Ans: page 178 table 7.4
6.
Briefly discuss the steps involved in the preparation flow of funds statements?
Ans: page 171-172
7.
What is common size analysis?
8.
What is Index Analysis?
9.
What are Deferred taxes and where do they come from?
Ans: Page 156
10.
Discuss the two types of adjustments made using deferred taxes to the firm’s financial statement?
Ans: page 157
11.
Contrast flow of funds (sources and uses) statements with cash budget as planning tools?
Ans: Flow of funds (sources and uses) statements provide the analyst with information generally being about year-to-year changes in assets and how these changes are financed. It is important to recognize that these sources and uses of funds are changes in the balance sheet that occur from one point in time to another without revealing any information about the interim time period.
Also, the sources and uses of funds statement does not represent cash movements. The cash
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12.
What is the purpose of statement of cash flow?
Ans: A statement of cash flows reports a firm's cash inflows and outflows during a period of time segregated into three categories: operating, investing, and financing activities. When used with other financial statements and disclosures, the statement of cash flows should help the analyst to: assess a firm's ability to generate cash for dividends and investments; identify a firm's needs for external financing; and, understand the difference between net income and net cash flow from operating activities.
13.
Why do most audited financial reports to the shareholder include a statement of cash flow in addition to income statement and balance sheet?
Ans: The purpose of accounting statements is to provide information to creditors and investors so that they may make a correct assessment of the risk and return characteristics of the firm. The statement of cash flows may provide insights not apparent in studying either the income statement or balance sheet. The statement of cash flows reports the firm's cash inflows and outflows, during the year, segregated into three categories: operating, investing, and financing activities. (And, yes, SFAS No. 95 requires that a statement of cash flows be included as part of a complete set of audited financial statements.)
14.
Does increasing a firm’s inventory turnover ratio increase its profitability?
Ans: Yes, it could. By increasing the turnover the company is really reducing its investment in excessive stocks of inventory carrying a low or zero rate of return. The resulting inventory is said to be more liquid or more readily convertible into cash. However, if the reduction in inventory levels is accomplished by a loss of sales due to stock outs, the increased turnover ratio may be unfavorable.
15.
What is the difference between cross sectional and time series ratio analysis?
Ans:
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16.
Under what circumstances would the quick ratio be the preferred measure of overall firm liquidity?
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