Professional Documents
Culture Documents
Multiple Choice
1. Business analysis is the evaluation of a companys prospects and risks for
the purpose of making business decisions. These business decisions extend to: ....
EXCEPT
a. liability valuation
b. credit risk assessment
c. earnings predictions
d. audit testing
e. compensation negotiations
ANS: A REF: Subramanyam, Edisi II, Chapter 1
2. Component of Financial Statement Analysis are: ..... except
a. Profitability Analysis
b. Accounting Analysis
c. Equity Analysis
d. Analysis of cash flow
e. Risk Analysis
ANS: C REF: Subramanyam, Edisi II, Chapter 1
3. Every transaction captured in these three latter statements impacts the
balance sheet. Examples are .... except:
a. revenues affecting earnings and their subsequent reporting in retained
earning
b. expenses affecting earnings and their subsequent reporting in retained
earning
c. equity affecting earnings and their subsequent reporting in retained
earning
d. cash transactions in the statement of cash flows that are summarized in
the cash balance on the balance sheet
e. all revenue and expense accounts that affect one or more balance sheet
accounts.
ANS: C REF: Subramanyam, Edisi II, Chapter 1
4. This section gives preliminary exposure to five important sets of tools for
financial analysis:
a. Comparative financial statement analysis
b. Common-size financial statement analysis
c. Risk analysis
d. Cash flow analysis
e. Valuation
ANS: C REF: Subramanyam, Edisi II, Chapter 1
5. Ratios, like most techniques in financial analysis, are not relevant in
isolation. Instead, they are usefully interpreted in comparison with ...... except
a. prior ratios
b. predetermined standards
c. ratios of competitors
d. ratios of consumer
ANS: D REF: Subramanyam, Edisi II, Chapter 1
True/False
6. Types of business analysis are: credit analysis and equity analysis
ANS: T REF: Subramanyam, Edisi II, Chapter 1
7. financial statement analysis should be, and is, viewed as an important and integral
part of business analysis and all of its component analyses.
ANS: T REF: Subramanyam, Edisi II, Chapter 1
8. The basis of valuation is future value theory
ANS: F REF: Subramanyam, Edisi II, Chapter 1
9. Earnings are determined using the accrual basis of accounting.
ANS: T REF: Subramanyam, Edisi II, Chapter1
10. Colgates balance sheet is a listing of its investing and financing activities
at a point in time
ANS: T REF: Subramanyam, Edisi II, Chapter1
11. Individuals conduct comparative financial statement analysis by reviewing
consecutive balance sheets, income statements, or statements of equity period to
period.
ANS: F REF: Subramanyam, Edisi II, Chapter1
Matching
a. The weak form
b. The strong form
c. Operating activities
d. Investing Activities
e. Financing activities
f. discount rate
g. sales discount
12. ........... represent the carrying out of the business plan given its financing
and investing activities. C
13. ............ refer to methods that companies use to raise the money to pay for
these needs. E
14. Accordingly, to value a security an investor needs information of ....... F
15. The .......... EMH asserts that prices reflect fully the information contained
in historical price movements. A
TRUE/FALSE
1. GAAP stands for General American Accounting Principles, and must be adhered to
by publicly traded companies when preparing their financial statements.
ANS: F REF: Subramanyam, Edisi II, Chapter 2
2. FASB stands for Financial Accounting Service Bureau, and is a sub-division of the
Securities and Exchange Commission (SEC).
ANS: F REF: Subramanyam, Edisi II, Chapter 2
3. Under GAAP accounting, a company has the choice of using cash or accrual
accounting in preparing its financial statements.
ANS: F REF: Subramanyam, Edisi II, Chapter 2
4. Under cash accounting, a company must recognize revenues in financial
statements when the revenues are earned or realized.
ANS: F REF: Subramanyam, Edisi II, Chapter 2
5. Under accrual accounting, a company will recognize expenses as they are paid.
ANS: F REF: Subramanyam, Edisi II, Chapter 2
6. Accrual income is a better predictor of future cash flows than current cash flows.
ANS: T REF: Subramanyam, Edisi II, Chapter 2
7. The auditor provides "reasonable", as opposed to "absolute" assurance that the
financial statements provide no material misstatement.
ANS: T REF: Subramanyam, Edisi II, Chapter 2
8. Net income is usually higher than free cash flows.
ANS: T REF: Subramanyam, Edisi II, Chapter 2
9. By using earnings management, managers always try to increase income.
ANS: F REF: Subramanyam, Edisi II, Chapter 2
10. Income smoothing is a form of earnings management.
ANS: T REF: Subramanyam, Edisi II, Chapter 2
MATCHING
h. an accounting error.
i. annual filings made by a company with SEC.
j. qualified.
k. the result of a political process among groups with diverse interests.
l. revenues earned and expenses incurred in generating those revenues should be
reported in the same income statement.
m. management.
n. consistency and comparability.
o. shareholder value.
p. both recurring and nonrecurring components.
q. dividing permanent income by the cost of capital.
1. If a company fails to record a material amount of depreciation in a previous year,
this is considered:
2. 10-K reports are:
3. The management of Finner Company believes that "the statement of cash flows is
not a very useful statement" and does not include it with the company's financial
statements. As a result the auditor's opinion should be:
4. Accounting Standards are best described as:
5. The matching principle requires that:
6. The primary responsibility for fair and accurate financial reporting rests with the:
7. The two secondary qualities of accounting information to make it useful for
decision making are:
8. Economic income measures change in:
9. Economic income includes:
10. For a going concern, company value can be expressed by:
True/False
5. Companies invest assets in investment securities (also called marketable
securities).
ANS: T REF: Subramanyam, Edisi II, Chapter 4
6. Investment securities can be in the form of either debt or equity.
ANS: T REF: Subramanyam, Edisi II, Chapter 4
7. Redeemable preferred stock and convertible debt securities are
considered equity securities
ANS: F REF: Subramanyam, Edisi II, Chapter 4
8. Goodwill arising from business combination is not amortized.
ANS: T REF: Subramanyam, Edisi II, Chapter 4
9. Consolidated financial statements disregard the separate legal identities of
the parent and its subsidiary in favor of its economic substance.
ANS: T REF: Subramanyam, Edisi II, Chapter 4
10. Goodwill can only be recorded following the recognition of the fair market
values of all tangible (PP&E) and identifiable intangible (trademark) assets acquired.
ANS: T REF: Subramanyam, Edisi II, Chapter 4
Matching
a. To receive revenue and interest income
b. Equity securities
c. To receive dividend and stock price appreciation income
d. Debt securities
e. Gain/Loss on Sale
f. Hedges
g. Goodwill
h. Derivative
11. .......... are securities representing ownership interest in another entity
examples are common stock and nonredeemable preferred stock.
12. The main motivation for a company to purchase equity securities ......... to
receive dividend and stock price appreciation income.
13. The difference between the acquisition price and the fair value of the net
assets of the acquired company is recognized as .........
14. ............ is a financial instrument whose value is derived from the value of
another asset, class of assets, or economic variable such as a stock, bond,
commodity price, interest rate, or currency exchange rate.
15. ..........are contracts that seek to insulate companies from market risks.
Chapter 6
a) Permanent or recurring component
b) Transitory component
c) Value irrelevant component