Deck 3: Financial Statements and Ratio Analysis

Question 1

GAAP is the accounting profession's rule-setting body.

Answer 1

False

Question 2

The amount paid in by the original purchasers of common stock is shown by two entries in the firm's balance sheet-common stock and paid-in capital in excess of par on common stock.

Answer 2

True

Question 3

The income statement is a financial summary of a firm's operating results during a specified period while the balance sheet is a summary statement of a firm's financial position at a given point in time.

Answer 3

True

Question 4

Earnings per share represents amount earned during the period on each outstanding share of common stock.

Question 5

Publicly owned corporations are those which are financed by the proceeds from the treasury securities.

Question 6

The Financial Accounting Standards Board (FASB) is the federal regulatory body that governs the sale and listing of securities.

Question 7

Common stock dividends paid to stockholders is equal to the earnings available for common stockholders divided by the number of shares of common stock outstanding.

Question 8

Earnings per share results from dividing earnings available for common stockholders by the number of shares of common stock authorized.

Question 9

Paid-in capital in excess of par represents a firm's book value received from the original sale of common stock.

Question 10

The McCain-Feingold Act of 2002 was passed to eliminate many of the disclosure and conflict-of-interest problems of corporations.

Question 11

The Sarbanes-Oxley Act of 2002 established the Private Company Accounting Oversight Board (PCAOB) which is a for-profit corporation that oversees CEOs of public corporations.

Question 12

The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB) which is a not-for-profit corporation that oversees auditors of public corporations.

Question 13

The Sarbanes-Oxley Act of 2002 was passed to eliminate many of the disclosure and conflict-of-interest problems of corporations.

Question 14

Generally accepted accounting principles are authorized by the Financial Accounting Standards Board (FASB).

Question 15

The common stock entry in balance sheet is the par value of common stock.

Question 16

Retained earnings represent the cumulative total of all earnings, net of dividends, that have been retained and reinvested in the firm since its inception.

Question 17

The balance sheet is a statement which balances a firm's assets (what it owns) against its debt (what it owes) or its equity (what is provided by owners).

Question 18

Publicly owned corporations with more than $5 million assets are required by the Securities and Exchange Commission (SEC) and individual state securities commissions to provide their stockholders with an annual stockholders' report.

Question 19

The president's letter, the first component of the stockholders' report, is the primary communication from management to a firm's employees.

Question 20

Net fixed assets represent the difference between gross fixed assets and accumulated depreciation of fixed assets.

Question 21

The original price per share received by the firm on a single issue of common stock is equal to the sum of the common stock and paid-in capital in excess of par accounts divided by the number of shares outstanding.

Question 22

The 2002 Sarbanes-Oxley Act was designed to ________.

A) limit the compensation that could be paid to corporate CEOs
B) eliminate the many disclosure and conflict-of-interest problems of corporations
C) provide uniform international accounting standards
D) provide the guidelines to minimize the tax

Question 23

The stockholder's report includes ________.

A) an estimated interest cost report
B) an estimated dividend report
C) a break-even sales report
D) a statement of retained earnings

Question 24

A U.S. parent company's foreign equity accounts are translated into dollars using the historical rate or average rate based on the company's discretion.

Question 25

A(n) ________ provides a financial summary of a firm's operating results during a specified period.

A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings

Question 26

The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called ________.

A) the McCain-Feingold Act
B) the Harkins-Oxley Act
C) the Sarbanes-Harkins Act
D) the Sarbanes-Oxley Act

Question 27

The statement of cash flows provides insight into a firm's operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period of concern.

Question 28

The Public Company Accounting Oversight Board (PCAOB) ________.

A) is a not-for-profit corporation that oversees auditors of public corporations
B) is a not-for-profit corporation that oversees managers of public corporations
C) is a for-profit corporation that oversees auditors of public corporations
D) is a for-profit corporation that oversees managers of public corporations

Question 29

The federal regulatory body governing the sale and listing of securities is called the ________.

A) IRS
B) FASB
C) GAAP
D) SEC

Question 30

The stockholders' annual report must include ________.

A) common-size financial statements
B) an income statement
C) an advance tax statement
D) the margin of safety report

Question 31

The statement of cash flows reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year.

Question 32

Net profit after taxes is ________.

A) gross profits minus operating expenses
B) sales revenue minus cost of goods sold
C) EBITDA minus interest
D) EBIT minus interest and taxes

Question 33

A U.S. parent company's foreign retained earnings are not adjusted for currency movements to reflect each year's operating profits or losses.

Question 34

Total assets less net fixed assets equals ________.

A) gross assets
B) current assets
C) depreciation
D) liabilities and equity

Question 35

Accounting practices and procedures used to prepare financial statements are called ________.

A) SEC
B) IFRS
C) GAAP
D) IRB

Question 36

The rule-setting body, which authorizes generally accepted accounting principles is the ________.

A) IFRS
B) FASB
C) SEC
D) Federal Reserve System

Question 37

Gross profit is ________.

A) operating profits minus depreciation
B) operating profits minus cost of goods sold
C) sales revenue minus operating expenses
D) sales revenue minus cost of goods sold

Question 38

A firm's annual stockholders' report ________.

A) is only accessible to the shareholders of the firm
B) summarizes and documents the firm's financial activities during the past year
C) documents the list of all investors who bought the firm's shares during the past year
D) summarizes and documents the firm's financial plan and budgets during the past year

Question 39

The Financial Accounting Standards Board (FASB) Standard No. 52 mandates that U.S.-based companies translate their foreign-currency-denominated assets and liabilities into dollars using the current rate (translation) method.

Question 40

Operating profit is ________.

A) gross profit minus operating expenses
B) sales revenue minus cost of goods sold
C) earnings before depreciation and taxes
D) sales revenue minus depreciation expense

Question 41

On the balance sheet, net fixed assets represent ________.

A) gross fixed assets at cost minus depreciation expense
B) gross fixed assets at market value minus depreciation expense
C) gross fixed assets at cost minus accumulated depreciation
D) gross fixed assets at market value minus accumulated deprecation

Question 42

Which of the following is a current liability?

A) accounts receivable
B) cash
C) notes payable
D) inventory

Question 43

Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34 percent, and it paid preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest expense. What was Candy Corporation's earnings per share?

A) $3.91
B) $4.52
C) $7.42
D) $7.59

Question 44

A firm has the following accounts and financial data for 2014: The firm's earnings per share for 2014 is ________.

A) $0.5335
B) $0.5125
C) $0.3204
D) $0.3024

Question 45

A firm had the following accounts and financial data for 2014: The firm's net profit after taxes for 2014 is ________.

A) -$206.40
B) $213.80
C) $320.40
D) $206.25

Question 46

The net value of fixed assets is also called its ________.

A) market value
B) par value
C) book value
D) intrinsic value

Question 47

A firm has the following accounts and financial data for 2014: The firm's earnings available to common shareholders for 2014 is ________.

A) -$224.25
B) $195.40
C) $302.40
D) $516.60

Question 48

Retained earnings on the balance sheet represents the ________.

A) net profit after taxes
B) amount of proceeds in excess of the par value received from the original sale of common stock
C) net profit after taxes minus preferred dividends
D) cumulative total of all earnings reinvested in the firm

Question 49

Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of $34,000, and preferred dividends of $5,000. What was the firm's net profit after taxes?

A) $66,000
B) $49,000
C) $44,000
D) $83,000

Question 50

When preparing the retained earnings statement, ________ is(are) subtracted in order to derive at the ending balance of retained earnings.

A) net profits after taxes
B) interest expense
C) depreciation
D) dividends

Question 51

Which of the following is a fixed asset?

A) land
B) accounts payable
C) accruals
D) notes payable

Question 52

The statement of cash flows ________.

A) shows the financial position of a firm at a given point of time.
B) summarizes all the purchase and sale of fixed assets and raw materials
C) provides insight into a firm's operating, investment, and financing cash flows
D) classifies a firm's cash flows as operating, investing, financing, and other activities

Question 53

The ________ represents a summary statement of a firm's financial position at a given point in time.

A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings

Question 54

A firm's year-end retained earnings balances are $320,000 and $400,000, for 2014 and 2015 respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm's dividend payment for 2015 is ________.

A) $0
B) $20,000
C) $80,000
D) $100,000

Question 55

Which of the following represents a current asset?

A) automobiles
B) buildings
C) marketable securities
D) equipment

Question 56

A firm's year-end retained earnings balances are $670,000 and $560,000, for 2014 and 2015 respectively. The firm paid $10,000 in dividends in 2015. The firm's net profit after taxes in 2015 was ________.

A) -$100,000
B) -$110,000
C) $100,000
D) $110,000

Question 57

Operating profit is known as ________.

A) earnings after interest and taxes
B) earnings before interest and taxes
C) earnings before depreciation and taxes
D) earnings after tax

Question 58

Earnings available for common stockholders is calculated as net profits ________.

A) before taxes minus preferred dividends
B) after taxes minus preferred dividends
C) after taxes minus common dividends
D) before taxes minus common dividends

Question 59

A firm has a year-end retained earnings balance of $220,000 for 2014. The firm reported net profits after taxes of $50,000 and paid dividends of $30,000 in 2015. The firm's retained earnings balance at 2015 year end is ________.

A) $240,000
B) $250,000
C) $270,000
D) $300,000

Question 60

Paid-in capital in excess of par represents the amount of proceeds ________.

A) in deficit of the par value from the original sale of common stock
B) in excess of the par value from the original sale of common stock
C) in excess of the par value from the current value of common stock
D) in excess of the par value from the intrinsic value of common stock

Question 61

Cross-sectional analysis involves the comparison of different firms' financial ratios at the same point in time.

Question 62

Ag Silver Mining, Inc. has $500,000 of earnings before interest and taxes at the year end. Interest expenses for the year were $10,000. The firm expects to distribute $100,000 in dividends. Calculate the earnings after taxes for the firm assuming a 40 percent tax on ordinary income.

Question 63

At the end of 2015, Long Life Light Bulb Corporation announced a gross profit of $1 million. The company has also established that over the course of this year that it has incurred $345,000 in operating expenses and $125,000 in interest expenses. The company is subject to a 30% tax rate and has declared $57,000 of total preferred stock dividends.
(a) Calculate the earnings available for common stockholders?
(b) Compute the increased retained earnings for 2015 if the company were to declare a $4.25 common stock dividend. The company has 15,000 shares of common stock outstanding.

Question 64

A firm's year-end retained earnings balance are $670,000 and $560,000 for 2014 and 2015, respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm paid dividends of ________ in 2015.

A) $10,000
B) $100,000
C) $110,000
D) $210,000

Question 65

On December 31, 2014, Bradshaw Corporation had $485,000 as an ending balance for its retained earnings account. During 2015, the corporation declared a $3.50/share dividend to its stockholders. The company has 35,000 shares of common stock outstanding. When the books were closed for 2015 year end, the corporation had a final retained earnings balance of $565,000. What was the net profit earned by Bradshaw Corporation during 2015?

Question 66

Information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements can be found on ________.

A) the notes to the financial statements
B) the statement of retained earnings
C) the proxy statement
D) the management discussion and analysis(MD&A)

Question 67

Creditors are primarily interested in short-term liquidity of the company and its ability to make interest and principal payments.

Question 68

Reliable Auto Parts has 5,000 shares of common stock outstanding. The company also has the following amounts in revenue and expense accounts. Calculate
(a) gross profits.
(b) operating profits.
(c) net profits before taxes.
(d) net profits after taxes (assume a 40 percent tax rate).
(e) earnings available to common stockholders.
(f) earnings per share.

Question 69

Both current and prospective shareholders are interested in the firm's current and future level of risk and return, which directly affect share price.

Question 70

Time-series analysis evaluates the performance of various firms at the same point in time using financial ratios.

Question 71

Due to inflationary effects, inventory costs and depreciation write-offs can differ from their true values, thereby distorting profits.

Question 72

Benchmarking is a type of cross-sectional analysis in which a firm's ratios are compared to a key competitor firm within the same industry, primarily to identify areas for improvement.

Question 73

Time-series analysis is the evaluation of a firm's financial performance in comparison to other firm(s) at the same point in time.

Question 74

FASB Standard No. 52 mandates that U.S.-based companies must translate their foreign-currency-denominated assets and liabilities into dollars using the ________.

A) historical rate
B) current rate
C) average rate
D) rate prescribed by the SEC

Question 75

Sunshine Corporation had a retained earnings balance of $850,000 at the beginning of 2015. By the end of 2015, the company's retained earnings balance stood at $950,000. During 2015, the company earned $245,000 as net profits after paying its taxes. The company was then able to pay its preferred stockholders a sum of $45,000. Compute the common stock dividend per share in 2015 assuming 10,000 shares of common stock outstanding.

Question 76

Benchmarking is a type of time-series analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to isolate areas of opportunity for improvement.

Question 77

A single key ratio of a firm provides all the information required to judge the overall performance of the firm.

Question 78

The basic inputs to an effective financial analysis are the firm's income statement and the balance sheet.

Question 79

Colonial Furniture's net profits before taxes for 2015 totaled $354,000. The company's total retained earnings were $338,000 for 2014 year-end and $389,000 for 2015 year-end. Colonial is subject to a 26 percent tax rate. What was the cash dividend declared by Colonial Furniture in 2015?

Question 80

Ratios merely direct an analyst to potential areas of concern and it does not provide conclusive evidence as to the existence of a problem.