Deck 11: Expanded Analysis

Question 1

Which of the following ratios is given the highest significance rating by controllers?

A) Current Ratio
B) Earning Per Share
C) Return on Equity - After Tax
D) Return on Assets - After Tax
E) Price/Earnings Ratio

Answer 1

B

Question 2

Most of the ratios given a high significance rating by commercial loan officers have a primary measure of liquidity or debt.

Answer 2

True

Question 3

Which of the following ratios appears most frequently in annual reports?

A) Earnings per Share
B) Return on Equity
C) Profit Margin
D) Effective Tax Rate
E) Debt/Equity

Answer 3

A

Question 4

Which of the following ratios is a primary measure of liquidity according to the corporate controller survey?

A) Earnings per Share
B) Debt/Equity Ratio
C) Return on Equity after Tax
D) Current Ratio
E) None of the answers are correct

Question 5

Which of the following statements is not true?

A) A review of financial statements, including the notes, will indicate how conservative the statements are in regard to accounting policies.
B) Accounting policies that result in the slowest reporting of income are the most conservative.
C) When a firm has conservative accounting policies, it is said that its earnings are of high quality.
D) Under inflationary conditions, the least conservative inventory method is fifo.
E) Conservative accounting policies always result in the lowest reported income for any given period of time.

Question 6

Which of the following ratios is rated to be a primary measure of liquidity and the highest significance rating of the liquidity ratios according to commercial loan departments?

A) Debt/Equity
B) Current Ratio
C) Degree of Financial Leverage
D) Inventory Turnover in Days
E) Accounts Receivable Turnover in Days

Question 7

Which of the following ratios is given the highest significance rating by commercial loan officers?

A) Inventory Turnover In Days
B) Degree of Financial Leverage
C) Times Interest Earned
D) Fixed Charge Coverage
E) Debt/Equity

Question 8

There are many definitions or descriptions given to financial failure.Which of the following does not appear to be a reasonable definition or description.

A) refinancing of bonds payable
B) liquidation
C) deferment of payments to short-term creditors
D) deferment of payments of interest on bonds
E) deferment of payments of principal on bonds

Question 9

Which of the following statements is not true?

A) The depreciation method and the period of time selected to depreciate an asset can have a significant influence on income.
B) There are many depreciation methods.
C) The depreciation methods that recognize a large amount of depreciation in the later years of an asset's life are conservative.
D) The straight-line depreciation method recognizes depreciation in equal amounts over each year of the life of the asset.
E) There is sometimes a material difference in the lives used for depreciation between firms.

Question 10

Which of the following variables indicates a measure of cumulative profitability over time?

A) retained earnings (balance sheet)/total assets
B) earnings before interest and taxes/total assets
C) working capital/total assets
D) market value of equity/book value of total debt
E) sales/total assets

Question 11

Which of the following is not a reasonable matching?

Question 12

Edward I.Altman developed a multivariate model to predict bankruptcy.The model produces an overall discriminant score called a Z value.Which of the following statements is probably an unreasonable statement relating to the Z value?

A) The sales generating ability of the firm's assets is one of the important considerations in the Z value.
B) The lack of a market value for a company's stock will reduce the significance of the Z value approach.
C) Total assets is an important consideration in the Z value computation.
D) Cumulative profitability over time is considered in the Z value computation.
E) A Z score of 2.00 or below indicates a very healthy company.

Question 13

Which of the following is not a discounted cash flow model for valuation?

A) free cash flow
B) dividend discount model
C) discounted cash flow
D) discounted abnormal earnings
E) all of the answers are discounted cash flow models

Question 14

Which of the following ratios is given the highest significance rating by Certified Public Accountants?

A) Quick Ratio
B) Debt/Equity
C) Net Profit Margin
D) Current Ratio
E) Times Interest Earned

Question 15

Which financial ratio appears most frequently in loan agreements according to commercial loan officers?

A) Quick Ratio
B) Cash Flow/Total Debt
C) Debt/Equity
D) Times Interest Earned
E) Cash ratio

Question 16

Which of the following is not a multiple approach to valuation?

A) discounted cash flow
B) price-to-earnings (PE)
C) price-to-book
D) price-to-operating cash flow
E) price-to-sales

Question 17

Tom Copeland, Tim Keller, and Jack Morrin, on their book Valuation, Measuring and Managing the Value of Companies, observed that acquirers paid too much for companies because of all but one of the following reasons:

A) market potential greater than estimated
B) overoptimistic appraisal of market potential
C) overestimation of synergies
D) poor due diligence
E) overbidding

Question 18

In financial accounting, which of the following assets is not considered to be an intangible asset?

A) goodwill
B) patents
C) copyrights
D) trademarks
E) accounts receivable

Question 19

Which of the following depreciation methods is considered to be the least conservative?

A) Sum-of-the-Years' Digits
B) Declining-Balance Method
C) Straight-Line
D) each method is equally conservative
E) Sum-of-the-Years' Digits and Declining-Balance Method are equally conservative

Question 20

The Beaver Study indicated the following ratio (ratios) to be the best for forecasting financial failure.

A) cash flow/total debt
B) net income/total assets
C) total debt/total assets
D) cash flow/total debt and net income/total assets
E) all of the answers are correct

Question 21

Beaver did a study that indicated that failed firms have less cash but more inventory one year before failure than do similar firms that do not fail.

Question 22

A review of the computational methodology used to compute the ratios for annual reports indicated that there were wide differences of opinion on how many of the ratios should have been computed.

Question 23

Under inflationary conditions, the least conservative inventory method is lifo.

Question 24

Accounting policies that result in the fastest reporting of income are the most conservative.

Question 25

It is likely that particular attention should be paid to cash, accounts receivable, and inventory when forecasting financial failure.

Question 26

The completed-contract method recognizes all income when the contract is completed, while the percentage-of- completion method recognizes income as work progresses on the contract.The completed-contract method is the conservative method.

Question 27

Presently, no regulatory agency, such as the Securities and Exchange Commission or the Financial Accounting Standards Board, accepts responsibility for determining either the content of financial ratios or the format of presentation in annual reports.

Question 28

It is logical that there would be a high correlation between ratios that are rated to be highly significant and ratios that are included in corporate objectives.

Question 29

In general, controllers rate profitability ratios to have a higher significance than debt ratios.

Question 30

There is a major effort to explain financial results by the disclosure of financial ratios in annual reports.

Question 31

Ratios with a primary measure of profitability appear frequently in loan agreements.

Question 32

An auditor can use financial ratios in analytical review procedures.

Question 33

The straight-line depreciation method is a conservative depreciation method.

Question 34

The straight-line depreciation method recognizes depreciation in equal amounts over each year of the life of the asset.Therefore, the straight-line depreciation method is a conservative depreciation method.

Question 35

Most of the ratios given a high significance rating by chartered financial analysts have a primary measure of profitability.

Question 36

Substantial research and development will result in more conservative earnings.

Question 37

The interest rate that is assumed to be earned on pension funds can have a material influence on the pension expense and the pension liability.The higher the rate of interest assumed to be earned on pension funds, the higher the pension expense and the higher the pension liability.

Question 38

There are many practical and theoretical issues related to the computation of financial ratios.

Question 39

With the Altman model, the higher the Z score, the more likely the firm will go bankrupt.

Question 40

A univariate model to predict financial failure uses a single variable in a prediction model.

Question 41

A column graph has columns in horizontal form.

Question 42

Visually, a pie graph can mislead because of an illusion.

Question 43

The financial literature and valuation books strongly support the use of multiperiod discounted valuation model either in terms of earnings or cash flow.

Question 44

Ideally, a proposed comprehensive budget should be compared with financial ratios that have been agreed upon as part of the firm's corporate objectives.

Question 45

The information on a firm's lifo reserve can be used to improve the analysis of inventory, liquidity in general, and the debt position.

Question 46

Analytical review procedures may be performed at various times within the audit.

Question 47

Profitability ratios are the most likely ratios to be selected for corporate objectives.

Question 48

The studies cited [(Barker, 1999), (Demirakos et al, 2003), and (Asquith et al, 2004)], all agree on the fact that multi-period discounted valuation models seem to play a significant role in analysts' normal valuation activity.

Question 49

Usually, a company must make estimates in the preparation of financial statements as of a given date.

Question 50

A decline in the acid-test ratio indicates a reduced ability to pay current liabilities with funds from the sale of inventory.