Question 1

Which of the following is a question an analyst would ask when assessing the quality of a firm's financial statements?
A) Are the company's products designed to meet a specific market segment?
B) Has the firm integrated forward into retailing to final consumers?
C) Is the firm diversified across several geographical markets?
D) Do earnings include nonrecurring gains or losses?

Accepted Answer

An analyst would ask whether the earnings include nonrecurring gains or losses to determine the reliability and accuracy of the financial statements. The other choices relate to other aspects of the business, but not necessarily the quality of the financial statements.

Question 2

When assessing buyer power using Porter's five forces, which of the following is not consistent with low buyer power?
A) Brand loyalty
B) Control of distribution channel
C) Large number of suppliers
D) Low price

Accepted Answer

Large number of suppliers actually increases buyer power because buyers have more options to choose from, which can drive down prices and improve terms for buyers.

Question 3

Which of the following is not one of Porter's five forces?
A) Buyer Power
B) Supplier Power
C) Threat of Regulation
D) Threat of Substitutes

Accepted Answer

Porter's five forces are Buyer Power, Supplier Power, Threat of New Entrants, Threat of Substitutes, and Competitive Rivalry. Threat of Regulation is not one of Porter's five forces.

Question 4

When attempting to identify the economic characteristics of the industry in which a particular firm participates an analyst might ask which of the following questions?
A) Does technological change play an important role in the firm maintaining a competitive advantage?
B) Has the firm diversified across several geographic markets?
C) Has the firm recognized revenues at the proper time?
D) Has the firm structured transactions to make it look more profitable than economic conditions suggest?

Accepted Answer

Technological change's role in maintaining a competitive advantage is directly related to the economic characteristics of an industry, as it can influence the pace of innovation, competition, and market dynamics within that industry.

Question 5

The accrual basis method of accounting can be best described as:
A) The recording of transactions and adjustments so that debits equal credits.
B) The method that equates assets with liabilities and owners' equity.
C) The method that recognizes revenue when money is received.
D) The method that matches incurred expenses with related revenues when they are earned.

Accepted Answer

The accrual basis method of accounting is the method that matches incurred expenses with related revenues when they are earned. This means that revenue is recognized when it is earned and expenses are recognized when they are incurred, regardless of when cash is received or paid out. The goal is to provide a more accurate picture of a company's financial performance over a given period.

Question 6

Which of the following assets would appear on the balance sheet at an amount greatly below its fair market value?
A) inventory
B) marketable securities
C) equipment
D) brand name

Accepted Answer

Brand names are often listed on the balance sheet at historical cost, which can be significantly lower than their fair market value, especially if the brand has been built over many years without direct acquisition costs.

Question 7

A value chain for an industry sets forth
A) the layers of management the needed to be successful
B) sequence of activities involved in the creation, manufacture and distribution of its products.
C) Sequence of activities involved in a firm's research and development activities.
D) Whether the industry is horizontally or vertically integrated.

Accepted Answer

A value chain for an industry sets forth the sequence of activities involved in the creation, manufacture, and distribution of its products. It typically includes activities such as inbound logistics, operations, outbound logistics, marketing and sales, and customer service. It does not necessarily relate to layers of management, research and development activities or whether the industry is horizontally or vertically integrated.

Question 8

Which of the following would not appear as a liability on the balance sheet?
A) a labor contract
B) a note due to a bank
C) salary due employees at year-end
D) accounts payable

Accepted Answer

A labor contract is not a liability that would appear on the balance sheet. It is a contractual agreement between the company and the employee, but it does not represent a payment obligation that the company owes. The other options (B, C, and D) are all examples of liabilities that would appear on the balance sheet.

Question 9

Which of the following economic characteristics is consistent with a grocery store chain?
A) minimal competition
B) extensive competition
C) high net income to sales
D) differentiated product

Accepted Answer

A grocery store chain typically faces extensive competition from other grocery stores, supermarkets, and even online retailers. This competition typically drives profit margins down and requires the grocery store chain to constantly innovate and differentiate their products and services to remain competitive. While some grocery store chains may have high net income to sales ratios, this is not a consistent characteristic across the entire industry. Differentiated products are also important for grocery store chains, but this is not an economic characteristic specific to them.

Question 10

Which of the following economic characteristics is consistent with a pharmaceutical company?
A) Low barriers to entry.
B) High levels of research and development.
C) Low profit margins.
D) Low business risk.

Accepted Answer

High levels of research and development are consistent with pharmaceutical companies, as they must invest heavily in R&D to develop new drugs and keep up with advancements in medical technology. The other options are not consistent with the economic characteristics of the pharmaceutical industry.

Question 11

Which of the following economic characteristics is consistent with a grocery store chain?
A) Low barriers to entry.
B) High levels of research and development.
C) High profit margins.
D) Low capital intensity.

Accepted Answer

Grocery store chains typically face low barriers to entry because new competitors can enter the market with relative ease compared to industries that require high levels of specialized knowledge, technology, or capital.

Question 12

Which of the following is not an activity reported in the cash flows financial statement?
A) operating
B) investing
C) manufacturing
D) financing

Accepted Answer

Cash flows statement reports cash inflows and outflows from operating, investing, and financing activities. Manufacturing is not a type of cash flow activity, it is a function of the business.

Question 13

The third step in financial statement analysis is to assess the quality of the firm's financial statements. Which of the following is a question an analyst should ask when performing this step?
A) Are industry sales growing rapidly or slowly?
B) Do earnings include revenues that appear mismatched with the business model employed by the firm?
C) Does the industry include a large number of firms selling similar products?
D) What is the company's degree of geographical diversification?

Accepted Answer

Assessing the quality of the firm's financial statements involves analyzing whether the financial statements accurately reflect the company's financial position and performance. One way to do this is to examine whether earnings contain revenues that appear to be mismatched with the business model employed by the firm. This could indicate an attempt to manipulate earnings or misrepresent the company's financial position. None of the other answer options pertain to assessing the quality of the firm's financial statements.

Question 14

Which of the following economic characteristics is consistent with a commercial bank?
A) Low barriers to entry.
B) High levels of research and development.
C) Low profit margin on lending activities.
D) Low profit margin on fee-based financial services, such as merger consulting.

Accepted Answer

Commercial banks typically have high profit margins on their lending activities, as this is their primary source of revenue. They often face high barriers to entry due to regulatory requirements, making options A and B unlikely. While some commercial banks may offer fee-based financial services, these are typically not the primary focus of their business and may not have a significant impact on overall profitability, making option D less likely as well.

Question 15

The second step in financial statement analysis is to identify the company strategy. Which of the following is a question an analyst should ask when performing a strategy analysis?
A) Are industry sales growing rapidly or slowly?
B) Do earnings include revenues that appear mismatched with the business model employed by the firm?
C) Does the industry include a large number of firms selling similar products?
D) What is the company's degree of geographical diversification?

Accepted Answer

Identifying the company's degree of geographical diversification is important because it can provide insight into the company's growth potential and risk exposure. Understanding the company's strategy in terms of where it is operating or looking to expand can also help the analyst evaluate the company's competitive position and potential investment opportunities. The other options (A, B, and C) are relevant factors to consider in financial statement analysis, but they do not directly relate to identifying the company's strategy.

Question 16

On a common size basis, which of the following assets is normally largest for a commercial bank?
A) Accounts and Notes Receivable
B) Inventory
C) Property, Plant and Equipment
D) Cash and Marketable Securities

Accepted Answer

The answer of On a common size basis, which of...

Question 17

An example of an intangible asset is
A) a patent
B) land
C) investment in another company
D) raw material inventory

Accepted Answer

An intangible asset is a non-physical asset that is valuable to a company because it represents a right or privilege that has monetary value. Patents are a form of intangible asset that gives the patent holder exclusive control over an invention or process for a limited period of time. Land, investment in another company, and raw material inventory are all examples of tangible assets.

Question 18

The accrual basis of accounting recognizes
A) revenue when cash is received from customers
B) expenses when paid
C) revenue when all or a substantial portion is performed
D) revenue when contracts are signed

Accepted Answer

The accrual basis of accounting recognizes revenue when all or a substantial portion is performed, regardless of when cash is received. This means that revenue is recognized when the services are provided or the products are delivered, regardless of whether or not payment has been received. This method provides a more accurate reflection of a company's financial performance and helps to match revenue with related expenses. Options A and D are incorrect because revenue recognition is not based on cash receipts or contract signing alone. Option B is incorrect because expenses are recognized when incurred, not necessarily when paid.

Question 19

The tools for studying industry economics do not include
A) Value chain analysis
B) Classification using Porter's five forces
C) Classification of cash flows
D) Economic attributes framework

Accepted Answer

Classification of cash flows is a tool used in financial analysis, not industry economics. The other options are all tools commonly used in studying industry economics.

Question 20

On a common size basis, which of the following assets is normally largest for a electric utility?
A) Accounts receivable
B) Inventory
C) Property, Plant and Equipment
D) Cash and Marketable Securities

Accepted Answer

Property, Plant, and Equipment are the largest assets on a common size basis for electric utilities as they require significant investment in infrastructure to generate and distribute electricity. Accounts receivable, inventory, and cash and marketable securities are relatively smaller in comparison.

Quiz 1: Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Which of the following is a question an analyst would ask when assessing the quality of a firm's financial statements?

When assessing buyer power using Porter's five forces, which of the following is not consistent with low buyer power?

Which of the following is not one of Porter's five forces?

When attempting to identify the economic characteristics of the industry in which a particular firm participates an analyst might ask which of the following questions?

The accrual basis method of accounting can be best described as:

Which of the following assets would appear on the balance sheet at an amount greatly below its fair market value?

A value chain for an industry sets forth

Which of the following would not appear as a liability on the balance sheet?

Which of the following economic characteristics is consistent with a grocery store chain?

Which of the following economic characteristics is consistent with a pharmaceutical company?

Which of the following economic characteristics is consistent with a grocery store chain?

Which of the following is not an activity reported in the cash flows financial statement?

The third step in financial statement analysis is to assess the quality of the firm's financial statements. Which of the following is a question an analyst should ask when performing this step?

Which of the following economic characteristics is consistent with a commercial bank?

The second step in financial statement analysis is to identify the company strategy. Which of the following is a question an analyst should ask when performing a strategy analysis?

On a common size basis, which of the following assets is normally largest for a commercial bank?

An example of an intangible asset is

The accrual basis of accounting recognizes

The tools for studying industry economics do not include

On a common size basis, which of the following assets is normally largest for a electric utility?