Question 1

The Securities and Exchange Commission (SEC) allowed publicly traded foreign companies to use the International Financial Reporting Standards (IFRS) rather than the Generally Accepted Accounting Principles (GAAP).

Accepted Answer

The SEC did allow publicly traded foreign companies to use IFRS instead of GAAP.

Question 2

Ratio analysis involves a comparison of the relationships between financial statement accounts to analyze the financial position and strength of a firm.

Accepted Answer

Ratio analysis involves comparing different financial statement accounts to assess the financial health of a company. By analyzing the relationship between various ratios, investors and management can determine the financial position and strength of the firm. Therefore, the statement that ratio analysis involves a comparison of the relationships between financial statement accounts to analyze the financial position and strength of a firm is true.

Question 3

In 2010, the Securities and Exchange Commission (SEC) announced its support for Generally Accepted Accounting Principles (GAAP).

Accepted Answer

False

Question 4

A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows.

Accepted Answer

The net income reported on the income statement does not always equal the operating cash flows on the statement of cash flows due to the effects of non-cash items such as depreciation and changes in working capital.

Question 5

Noncash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.

Accepted Answer

Noncash assets, such as property, plant, and equipment, are required to be recorded at their original cost less any accumulated depreciation. This cost may not necessarily reflect the current market value or the future cash flows that the assets will generate. Therefore, the ultimate amount of cash that these assets produce could be more or less than the values recorded on the books.

Question 6

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

Accepted Answer

Debt management ratios, such as debt-to-equity ratio and interest coverage ratio, are used to measure how much debt is being used by a company to finance its operations and how well it can service its debt obligations. These ratios provide insight into the extent to which the firm's managers are using financial leverage to maximize returns to owners' capital.

Question 7

Which of the following financial statements is included in the annual reports of a company?
A) Statement of changes in long-term financing
B) Fund flow statement
C) Statement of principles
D) Proxy statement
E) Statement of cash flows

Accepted Answer

The statement of cash flows is one of the four main financial statements included in a company's annual report, along with the balance sheet, income statement, and statement of changes in equity. The other options listed are not typically included in annual reports.

Question 8

The Securities and Exchange Commission (SEC) was created to develop and approve a set of common international accounting rules.

Accepted Answer

The SEC's mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. While the SEC works with international organizations on accounting standards, it does not have the authority to create or approve international accounting rules. The International Accounting Standards Board (IASB) is responsible for developing and approving common international accounting rules.

Question 9

Funds supplied by common stockholders mainly include capital stock, paid-in capital, and retained earnings, while total equity is comprised of common equity plus preferred stock.

Accepted Answer

Capital stock, paid-in capital, and retained earnings are all sources of funds provided by common stockholders, and common equity is a component of total equity that also includes preferred stock.

Question 10

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

Accepted Answer

The inventory turnover ratio measures how quickly a company sells its inventory. A decline in this ratio indicates that the company is taking longer to sell its inventory, which suggests that its liquidity position is worsening. It may be holding onto too much inventory or experiencing slower sales.

Question 11

The book value of shares are often equal to their market value.

Accepted Answer

The book value of shares may not always be equal to their market value. The book value is the value of a company's assets minus its liabilities, while the market value is the price at which shares are traded in the stock market. Factors such as company performance, supply and demand, and investor sentiment can all impact the market value of shares and cause them to deviate from their book value.

Question 12

The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.

Accepted Answer

The opposite is true. The balance sheet represents the financial position of a company at a specific point in time, while the income statement shows the company's financial performance over a period of time, usually a quarter or a fiscal year.

Question 13

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm's performance over time.

Accepted Answer

Trend analysis involves comparing financial data from multiple periods to identify patterns or trends in the firm's financial performance. It is a useful tool for assessing whether a company's financial position is improving, deteriorating, or remaining relatively stable over time.

Question 14

Retained earnings is the amount of cash that has been generated by the firm through its operations but has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm.

Accepted Answer

Retained earnings represent the cumulative amount of net income earned by a company that is retained by the company rather than distributed to its shareholders as dividends. Retained earnings are not necessarily kept in cash or near cash accounts; they can be reinvested in the company's operations, such as for purchasing assets, paying down debt, or funding new projects.

Question 15

The values or accounting numbers that are reported on the balance sheet are market values.

Accepted Answer

The values reported on the balance sheet are usually historical or book values, reflecting the initial cost of the assets or liabilities rather than current market values. However, some assets such as marketable securities or inventory may be reported at market values if they have changed significantly since their purchase.

Question 16

The balance sheet will have historical values and that will have an impact on the ratios of the firm.

Accepted Answer

The historical values on the balance sheet will impact the ratios of the firm since the calculations depend on the values of assets, liabilities, and equity at a specific point in time. If the values on the balance sheet are outdated or not reflective of the current market conditions, the ratios may not accurately reflect the financial health of the firm.

Question 17

A simple approach to trend analysis is to construct graphs.

Accepted Answer

Constructing graphs is a common and simple way to perform trend analysis.

Question 18

A firm's net income is the most appropriate measure to determine whether the management is maximizing the firm's stock price.

Accepted Answer

Net income is only one measure of a firm's performance and stock price is affected by various other factors such as market trends, investor sentiment, and overall economic conditions. Therefore, it is not the most appropriate measure to determine if management is maximizing stock price. Other measures such as return on equity, earnings per share, and return on assets may also need to be considered.

Question 19

The information contained in the annual report is used by investors to form expectations about future earnings and dividends.

Accepted Answer

The information contained in the annual report provides insight into a company's financial health and performance, which is important to investors when making investment decisions. By analyzing past performance and financial statements, investors can form expectations about a company's future earnings and dividends.

Question 20

Different accounting practices will not have an impact on the comparative ratio analysis of the firms.

Accepted Answer

Comparative ratio analysis involves comparing financial ratios of different companies to evaluate their financial performance. However, if the companies use different accounting methods, the ratios may not be comparable due to differences in the way financial information is reported. For example, a company using the LIFO inventory valuation method may report lower profits than a company using the FIFO method, affecting the profitability ratios. Therefore, different accounting practices can have a significant impact on comparative ratio analysis, making option B the correct answer.

Quiz 2: Analysis of Financial Statements