Understanding Accounting Concepts and Business Performance Evaluation

1. Rickety Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a cost of $91
each and a current replacement cost of $80 each. What is the ending inventory under lower of cost or
market?
A. $91,000.
B. $80,000.
C. $18,200.
D. $16,000.

2. Atlantis Company's ending inventory is understated $4,000. The effects of this error on the current year's
cost of goods sold and net income, respectively, are understated(overstated)/overstated(understate).
A. understated, overstated.
B. overstated, understated.
C. overstated, overstated.
D. understated, understated.

3. When there is a change in estimated depreciation when is correction made?

a) previous depreciation should be corrected.
b) current and future years’ depreciation should be revised.
c) only future years’ depreciation should be revised.
d) None of the above

4. Which one of the tangible fixed assets would not normally be depreciated?
Tangible fixed assets with an infinite life such as land do not need to be depreciated

5. Which one of the events must happen before a company can pay final proposed equity dividend?

6. What does it mean when we say a loan is secured by a fixed charge?

7. What is another word meaning 'debenture'?

Loan notes.

8. For 2007, FP Ltd had net income of Rs1,000,000. At 1January 2007, there were 1,000,000 shares
outstanding. On 1July 2007, the company issued 100,000 new shares for Rs20 per share. The company
paid Rs200,000 in dividends to common shareholders. What is FP Ltd’s basic earnings per share for
2007?

A. $0.73
B. $0.91
C. $0.95

9. CSI Ltd had 1,000,000 average shares outstanding during all of 2007. During 2007, CSI also had 10,000
options outstanding with exercise prices of Rs10 each. The average stock price of CSI during 2007 was
Rs15. For purposes of computing diluted earnings per share, how many shares would be used in the
denominator?
A. 1,000,000
B. 1,003,333
C. 1,010,000
10. Nutmeg, Inc. uses the LIFO method to account for inventory. During years in which inventory
unit costs are generally rising and in which the company purchases more inventory than it sells to
customers. What is the impact on gross profit compared with FIFO method?
A. lower than it would be if the company used the FIFO method.
B. higher than it would be if the company used the FIFO method.
C. about the same as it would be if the company used the FIFO method.

11. SC Ltd reported 2007 sales (Rs in millions) of Rs2,157 and cost of goods sold of Rs1,827. Inventories at
year-end 2007 and 2006, respectively, were Rs553and Rs562.The company uses the LIFO method for
inventory valuation and discloses that if the FIFO inventory valuation method had been used, inventories
would have been Rs63.3 million and Rs56.8 million higher in 2007 and 2006, respectively. Compared to
the inventory turnover ratio reported, if SC Ltd had exclusively used the FIFO method its inventory
turnover ratio would have been closest to?
A. Rs. 324.
B. Rs. 330.
C. Rs. 337.

12. You are comparing the property and equipment disclosures for three airline companies, as summarized in
the following table: You find that the average fleet age is lowest for which company
Airline A Airline B Airline C
Historical cost, aircraft $17,239 £23,584 €45,266
Accumulated depreciation, aircraft 6,584 13,654 21,745
Net cost, aircraft 10,655 9,930 23,521
Annual depreciation expense 575 786 1,509

Acana finds that the average fleet age is

A. lowest for Airline A.
B. lowest for Airline B.
C. lowest for Airline C.

13. When an asset is considered impaired?

A. When its carrying amount is greater than Net selling price?
B. Value in use
C. Undiscounted Future cash flows
D. Recoverable amount

14. How is change in accounting estimate reported?

must be accounted for prospectively in the financial statements, i.e. the effects of the change must
be incorporated in the accounting period in which the estimates are revised.

15. Impact when in the early years of an asset's life, compared to a firm using straight-line depreciation, a
firm uses the double-declining balance depreciation method.

16. What is comparison of a company's financial results to other peer companies for the same time period
called?
A. technical analysis.
B. time-series analysis.
C. cross-sectional analysis.

17. In order to assess a company's ability to fulfill its long-term obligations, which ratios would an analyst
most likely examine
 A. activity ratios.
B. liquidity ratios.
C. solvency ratios.

18. The principle or assumption dictating that efforts (expenses) be matched with accomplishments
(revenues) is called?
A. expense recognition principle.
B. historical cost assumption.
C. periodicity principle.

19. One of the following statements about the accrual basis of accounting is false. That statement is:
A. Events that change a company's financial statements are recorded in the periods in which the events
occur.
B. Revenue is recognized in the period in which services are performed.
C. Accrual-basis is in accordance with generally accepted accounting principles.
D. Revenue is recorded only when cash is received, and expense is recorded only when cash is paid.

20. In periods of rising prices, LIFO will produce following effect on net income:
A. higher net income than FIFO.
B. the same net income as FIFO.
C. lower net income than FIFO.
D. higher net income than average costing

21. Which ratio would a company most likely use to measure its ability to meet short-term obligations?
a. Current ratio
b. Payables turnover
c. Gross profit margin
d. Average days payable outstanding
e. None of the above.

22. John Chan is interested in assessing both the efficiency and liquidity of Spherion PLC. Chan has collected
the following data for Spherion: Based on this data, what is Chan least likely to conclude?
2005 2004 2003
Days of inventory on hand 32 34 40
Days' sales outstanding 28 25 23
Number of days of payables 40 35 35

A. Inventory management has contributed to improved liquidity.

B. Management of payables has contributed to improved liquidity.
C. Management of receivables has contributed to improved liquidity.

23. Marcus Lee is examining the solvency of Apex Manufacturing and has collected the following data (in
millions of euros):
2005 2004 2003
Total debt 2000 1900 1750
Total equity 4000 4500 5000
Which of would be the most appropriate conclusion for Lee?
A. The company is becoming increasingly less solvent, as evidenced by the increase in its debt - to -
equity ratio from 0.35 to 0.50 from 2003 to 2005.
B. The company is becoming less liquid, as evidenced by the increase in its debt - to -equity ratio from 0.35 to
0.50 from 2003 to 2005.
C. The company is becoming increasingly more liquid, as evidenced by the increase in its debt - to - equity
ratio from 0.35 to 0.50 from 2003 to 2005.

24. Brown Corporation had an average days sales outstanding of 19 days in 2005. Brown wants to decrease
its collection period in 2006 to match the industry average of 15 days. Credit sales in 2005were
$300million, and Brown expects credit sales to increase to $390 million in 2006. To achieve Brown's goal
of decreasing the collection period, what is the change in the average accounts receivable balance from
2005 to 2006 that must occur?
A. -$1.22 million.
B. -$0.42 million.
C. $0.42 million

25. An analyst gathered the following data for a company: Based only on the information above, what is the
the most appropriate conclusion over the period 2003 to 2005?
2005 2004 2003
ROE 22% 20% 19.8%
Return on total asset 7.9% 8% 8.1%
Total asset turnover 2.1 2 2
A. net profit margin and financial leverage have decreased.
B. net profit margin and financial leverage have increased.
C. net profit margin has decreased but its financial leverage has increased.

26. Rent-A-Center reported the following information related to total debt and shareholders' equity in its 2003
annual report. What would an analyst's most appropriate conclusion based on this data?
As At December 31
2003 2002 2001 2000 1999
Total debt 698,000 521,330 702,506 741,051 847,160
Stockholders' 794,830 842,400 405,378 309,371 206,690
equity
A. The company ' s solvency improved from 1999 to 2002.
B. The company ' s solvency improved from 2002 to 2003.
C. The data suggest the company increased debt in 2002.

27. In general, a creditor would consider a decrease in which of the ratios to be positive news?
A Interest coverage (times interest earned).
B Debt-to-total assets.
C Return on assets.

28. What does the P/E ratio measure?

A The "multiple" that the stock market places on a company's EPS.
B The relationship between dividends and market prices.
C The earnings for one common share of stock.

29. The gross profit margin is unchanged, but the net profit margin declined over the same period. Why
would this happened?
A cost of goods sold increased relative to sales.
B sales increased relative to expenses.
C the U.S. Congress increased the tax rate.
D dividends were decreased.
30. Almas Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. What does
this means for the company?
A will not experience any difficulty with its creditors.
B has less liquidity than other firms in the industry.
C will be viewed as having high creditworthiness.
D has greater than average financial risk when compared to other firms in its industry.

31. A company can improve (lower) its debt-to-total assets ratio by doing which methods?
A Borrow more.
B Shift short-term to long-term debt.
C Shift long-term to short-term debt.
D Sell common stock.

32. Which of the conditions would NOT improve the current ratio?
A.) Borrow short term to finance additional fixed assets.
B.) Issue long-term debt to buy inventory.
C.) Sell common stock to reduce current liabilities
D.) Sell fixed assets to reduce accounts payable.

33. Which of the is a true statement concerning the use of financial ratios to compare financial results of two
or more companies

34. Earnings per share (EPS) is computed by using which equation:

EPS = net income ÷ average outstanding common shares

35. This is how the acid-test ratio is calculated

Current assets-inventory/current liabilities

36. What is the counter impact if the size of an asset increases on a balance sheet
Liab or equity overvalued. Extra depreciation

37. What does the “Going Concern’ concept assumes?

The going concern principle is the assumption that an entity will remain in business for the foreseeable future. The
company has neither the intention nor the necessity to liquidate.

38. At what stage a manufacturer is permitted to recognized a transaction for inclusion within its profit and
loss account?

39. Which one of the following most closely defines 'Amortization'?

Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of
time. It also refers to the repayment of loan principal over time

40. Which is usually the first dividend to be paid in a financial year?

Interim dividend.

41. In calculating basic earnings per share, which 'weighted average' figure is used in the formula?
we calculate the weighted average number of ordinary shares outstanding.

42. A decomposition of ROE for Company A and Company B is as follows: Which best describes
reasonable conclusions an analyst might make based on this ROE decomposition?
Company A Company B
 2005 2004 2005 2004
ROE 26.46% 18.90% 26.33% 18.9%
Tax burden 0.70 0.75 0.75 0.75
Interest burden 0.90 0.90 0.90 0.90
EBIT margin 7% 10% 13% 10%
Asset turnover 1.50 1.40 1.50 1.40
Leverage 4 2 2 2

A. Company A's ROE is higher than Company B's in FY15, and one explanation consistent with the data
is that Company A may have purchased new, more efficient equipment.
B. Company A's ROE is higher than Company B's in FY15, and one explanation consistent with the data
is that Company A has made a strategic shift to a product mix with higher profit margins.
C. The difference between the two companies' ROE in FY15 is very small and Company A's ROE
remains similar to Company B's ROE mainly due to Company A increasing its financial
leverage.

43. In calculating basic earnings per share, net profit or loss is included in the formula after deduction of
these this
after-tax amount of any dividends declared on non-cumulative preferred stock, as well as the after-
tax amount of any preferred stock dividends

44. How is the market value of a company whose shares are listed on a stock market can be found?
Closing price x no of shares outstanding

45. When does a post balance sheet period ends?

the date that the financial statements are authorized for issue

46. A limited liability company in which you are a shareholder has just gone bankrupt. Its liabilities are far in
excess of its assets. What would you will be called on to pay:

1) a proportionate share of bondholder claims based on the number of common shares that you own.

2) a proportional share of all creditor claims based on the number of common shares that you own.

3) an amount that could, at most, equal what you originally paid for the shares of common stock in the
corporation.

4) nothing.

47. Is a corporation is a “legal entity’ that can be sued?

Yes

48. Equity financing has a tax advantage since dividends paid out to shareholders reduce a firm's taxable
income.
False

49. Frank Collins observes the following data for two companies: Which of the following choices
best describes reasonable conclusions that Collins might make about the two companies' ability
to pay their current and long-term obligations?
Company A Company B
Revenue 4,500 6,000
 Net income 50 1,000
Current assets 40,000 60,000
Total assets 100,000 700,000
Current liabilities 10,000 50,000
Total debt 60,000 150,000
Shareholders' equity 30,000 500,000

A. Company A ' s current ratio of 4.0x indicates it is more liquid than Company B, whose current ratio
is only 1.2x, but Company B is more solvent, as indicated by its lower debt - to - equity ratio.

B. Company A ' s current ratio of 25 percent indicates it is less liquid than Company B, whose current ratio is
83 percent, and Company A is also less solvent, as indicated by a debt - to - equity ratio of 200 percent
compared with Company B ' s debt - to - equity ratio of only 30 percent.

C. Company A ' s current ratio of 4.0x indicates it is more liquid than Company B, whose current ratio is only
1.2x, and Company A is also more solvent, as indicated by a debt - to - equity ratio of 200 percent
compared with Company B ' s debt - to - equity ratio of only 30 percent.

50. What is meant by a share sale is underwritten?

The broker/middleman was unable to get the required number of bids for the share purchase and had to buy
the remaining portion.

51. What is the significance of a preference share being described as cumulative?

If no dividend is paid in a year, the dividends won’t be ignored. Instead the next year, the company will
pay 2 years’ dividend to the preference shareholder.

52. Which circumstances might cause the gross margin to increase?

Higher sales. Lower cogs.

53. What is an advantage to shareholders in a low-geared company is:

A lower geared company offers a lower risk investment and as a result they can normally negotiate
additional loans more easily and at a lower interest rate than highly geared company.

54. What does it mean when a company shows a dividend cover of 3 times?
Dividend cover, also commonly known as dividend coverage, is the ratio of company's earnings (net income) over
the dividend paid to shareholders, calculated as net profit or loss attributable to ordinary shareholders by total
ordinary dividend.
Co has paid 1/3 of net income as dividend.

55. If a '5 for 3' rights issue is made at Rs.1.90 per share, How much would a shareholder who owns 15,000
shares pay to the company to buy all the shares he is entitled to?
15000*(5/3)*1.9=47500. Not very sure about it

56. If a '3 for 2' bonus issue is made to a shareholder who originally paid Rs.2 per share for 10,000 shares,
how much would the shareholder pay for the bonus shares if the current market value is Rs.4 per share?
No cash is paid in bonus issue.

57. A company has issued 2m shares at Rs.3.50 each. The nominal value of each share is Rs.0.50, and the
stock market price is Rs.5. What entries must be made on the balance sheet to record this share issue?
Cash Dr 7m
Share premium Cr 6m
Share capital Cr 1m

58. What is the role of an auditor?

The auditor then forms an opinion of whether the financial statements are free of material misstatement,
whether due to fraud or error.

59. Which one of the statements is not contained within a published annual report?
Other than income statement, balance sheet, cash flow statement, statement of changes in equity and notes to
the account.

60. What is Horizontal analysis?

A horizontal analysis, or trend analysis, is a procedure in fundamental analysis in which

an analyst compares ratios or line items in a company's financial statements over a certain
period of time