Review Sheet for Final

Financial Statement Analysis

Which of the following is correct?
I. If a company uses straight-line depreciation for financial reporting purposes, it is very likely they
have a deferred tax liability with respect to its depreciable assets.
II. Straight-line depreciation yields an increasing rate of return on book value over the life of an
asset.
III. Straight-line depreciation results in lower tax payments than accelerated depreciation methods
over the life of an asset.
IV. If a company revises its estimate of the useful life of an asset upwards this will decrease
annual depreciation expense.

A.
B.
C.
D.

I, II, III, and IV

I, II, and IV
I, II, and III
I and IV

Which of the following is not a reason for economic income and accounting income to differ?

A.
B.
C.
D.

Transaction basis
The monetary assumption
Conservatism
Earnings management

Assume a company that normally expenses advertising costs was to capitalize and amortize
these costs over 3 years instead. After the third year net income would:

A.
B.
C.
D.

be higher, irrespective of the change in advertising costs.

be lower, irrespective of the change in advertising costs.
be higher only if advertising costs were increasing.
be lower only if advertising costs were increasing.

What is the difference between capitalized and expense? For example, if the car is
$20,000. If you deduct all $20,000 in the first year, it is expense. If you depreciate it
over 5 years, assuming straight line method, each year depreciation expense is $4000.
What impact does it have on income, return on equity, return on asset, income statement?

A company changes its depreciation method from an accelerated system to straight-line. Which
of the following would normally be true?
I. The change would be discussed in the auditor's report.
II. The cumulative effect of the change would appear, net of tax, on the income statement.
III. The change would appear in cash flow from operations as a cash inflow.
IV. The change would be mentioned in the footnotes.

A.
B.
C.
D.

I, II, III, and IV

I, II, and III
II and IV
I, II, and IV

Which of the following is true with respect to extraordinary items?

I. Extraordinary items are recorded net of tax in income statement.
II. Extraordinary items, by definition, are probable and unusual in nature.
III. By definition, gains and losses from strikes are always extraordinary.
IV. By definition, gains and losses from sale of property, plant and equipment are never
extraordinary.

A.
B.
C.
D.

I and IV
I, III, and IV
II and IV
I, II, and III

Which of the following would require an adjustment in the computation of cash flow from
operations using the indirect method?
I. Sale of machinery for $50,000 with a net book value of $35,000
II. Purchase of supplies for cash
III. Remittance by customer in payment of goods purchased this accounting period
IV. Acquisition of land with simultaneous issuance of long-term note

A.
B.
C.
D.

I
I and II
I and III
IV

Beginning and ending accounts receivable are $76,000 and $42,000, respectively. Sales for the
period total $384,000, of which $40,000 was directly for cash. How much cash was collected from
making sales and collecting accounts receivable?

A.
B.
C.
D.

$344,000
$418,000
$378,000
$376,000

Which of the following is not a financing activity in the statement of cash flows?

A.
B.
C.
D.

Cash dividend
Repurchase of common stock
Payment of interest on debt
Issuance of new debt

Which of the following statements are correct?

I. A company's choice of accounting principles for financial reporting purposes affects net cash
flow for the accounting period.
II. A company's choice of accounting principles for financial reporting purposes does not affect
operating cash flow.
III. If a company sells its receivables, this will increase operating cash flow.
IV. If a company sells its receivables, this will increase financing cash flow.

A.
B.
C.
D.

I and III
I, II, and III
II and IV
I and IV

Firms report payments for capital leases in the cash flow statement:

A.
B.
C.
D.

only as financing cash flows.

only as investing cash flows.
partly as operating cash flows and partly as investing cash flows.
partly as operating cash flows and partly as financing cash flows.

Which of the following is true of depreciation?

A.
B.
C.
D.

It is recorded so that net book value represents fair value of assets.

It does not affect the amount of cash realized from operations as it is a noncash flow.
It is added back to net income to calculate cash from operations under the direct method.
It represents a fund from which to purchase future assets.

If the beginning and ending property, plant, and equipment are $500 million and $550 million
respectively, the gross book value of equipment sold was:

A.
B.
C.
D.

$120 million
$100 million
$80 million
$60 million

Beginning and ending plant assets are $325,000 and $370,000 respectively. Beginning and
ending accumulated depreciation are $82,800 and $95,000 respectively. Depreciation expense
for the period was $30,000, and new assets of $76,000 were purchased. Plant assets were sold
at a $10,500 loss. What were the cash proceeds from the sale?

A.
B.
C.
D.

$17,800
$3,100
$2,700
$31,000

The cash flow adequacy ratio:

A. measures a company's ability to generate sufficient cash flow from investing to cover debt
repayments.
B. measures a company's ability to generate sufficient cash flows from operations to cover
capital expenditures and debt repayment.
C. measures a company's ability to generate sufficient cash flows from operations to cover
capital expenditures, inventory additions, and cash dividends.
D. measures a company's ability to generate sufficient cash flows from operations to cover
capital expenditures, debt repayment, and dividends.

Which of the following statements is correct?

A. Net operating profit margin divided by net operating asset turnover equals return on net
operating assets.
B. Return on net operating assets can be disaggregated into net operating profit margin and
leverage.
C. Return on equity equals return on net operating assets less interest, net of tax.
D. Return on equity can be disaggregated into net operating profit margin, net operating asset
turnover and leverage.
Which of the following could explain a decrease in net operating asset turnover for a company?

A.
B.
C.
D.

Switching from straight line to accelerated depreciation for financial reporting purposes
An increase in the financial leverage of the company
Addition of a new plant for production purposes
Decrease cost of production inputs

Use this information to answer the two questions below:

Return on net operating assets for 2006 is:

A.
B.
C.
D.

11.30%.
12.03%.
9.93%.
11.19%.

Return on equity for 2006 is:

A.
B.
C.
D.

20.41%.
19.75%.
17.54%.
18.12%.

Which of the following will increase the sustainable equity growth of a company, all other things
equal?

A.
B.
C.
D.

Increase dividend payout

Pay suppliers more quickly
Pay suppliers more slowly
Decrease dividend payout

Which of the following will cause an increase in net operating income (NOPAT)?

A.
B.
C.
D.

Increase in the return on net operating assets

Decrease in the return on net operating assets
No change in the return on net operating assets
There is not sufficient information

Return on operating assets is a measure of which of the following?

A.
B.
C.
D.

Profitability
Efficiency
Solvency
Liquidity

The following information relates to Yutter Corporation:

What is the value of Yutter's stock at the end of Year 1 using the dividend discount model
assuming that the dividend payout ratio remains constant and Yutter grows at its sustainable
equity growth rate?

A.
B.
C.
D.

$83,333
$157,642
$500,000
$557,000

If Yutter's dividend payout ratio increased to 50% after year 1 then:

A.
B.
C.
D.

the sustainable equity growth rate would increase.

the return on equity would decrease.
the value of the stock would decrease.
the return on net operating assets would decrease.

Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive
companies producing widgets. Below are selected data:

Which of the following statements is the most plausible explanation of the difference in observed
net operating profit margins?

A.
B.
C.
D.

Widget Co's lower financial leverage

Widget Co uses LIFO and Tools uses FIFO
Widget Co's lower tax rate
Widget Co's net operating asset turnover

Which of the following statements best explains the difference in observed net operating asset
turnover?

A.
B.
C.
D.

Widget Co's lower financial leverage

Widget Co uses FIFO and Tools uses LIFO
Widget Co's lower tax rate
Widget Co has significant operating leases and Tool Inc. has no leases

The firm has net working capital $500. Long term debt is $1000. Total asset is $2000,
and long term asset is $1200. What is the total liabilities?
Relationship= net working capital = current asset current liability
Total asset = short term + long term
Total liability = short term + long term
Russell's Deli has cash of $136, accounts receivable of $95, accounts payable of
$210, and inventory of $409. What is the value of the quick ratio?
A. 0.31
B. 0.53
C. 0.71
D. 1.10
The reliability of short-term cash forecast depends most heavily on the quality of:

A.
B.
C.
D.

cost of goods sold forecast.

current ratio forecast.
sales forecast.
shares outstanding forecast.

What is the correct order of the following steps in preparing a projected income statement (not all
steps may be shown)?
I. Project future net sales
II. Project future net income
III. Project future cost of goods sold
IV. Project future interest expense

A.
B.
C.
D.

I, II, III, IV
II, IV, III, I
I, III, II, IV
I, III, IV, II

The statement of cash flows for Georgey Company for 2004 and 2005 is as follows:

Which of the following statements is correct?

A.
B.
C.
D.

Inventory was a use of cash for Georgey in 2005.

Current liabilities increased in 2005.
Georgey has a net outflow of cash in 2005.
Restructuring charges were a use of cash for Georgey in 2004.

If a company's cost of capital increases unexpectedly, which of the following actions will help it
maintain or increase its stock price?
I. Decrease its asset turnover
II. Increase its inventory
III. Increase its gross margin
IV. Issue a stock dividend

A.
B.
C.
D.

I and IV
II and III
III
I

Which of the following is the most useful in assessing short-term liquidity of a company?

A.
B.
C.
D.

Taxes payable
Retained earnings
Next period's sales
Prospective cash flows
Below is selected data for Gertup Corporation as of 12/31/05:

Gertup has maintained the same inventory levels throughout 2005. If end of year inventory
turnover was increased to 12 through more efficient relationships with suppliers, how much cash
would be freed up (pick closest number)?

A.
B.
C.
D.

$1,541
$1,233
$267
$42

The reasonableness and feasibility of short-term cash forecasts can be evaluated by preparing:

A.
B.
C.
D.

bank reconciliation statements.

pro forma financial statements.
responsibility reports.
interest coverage computations.

Which of the following statements is incorrect?

A. It is possible for a profitable company to go out of business because of short-term liquidity

problems.
B. If a company has a current ratio greater than 1, it will never go out of business because of
liquidity problems.
C. The current ratio is always greater than or equal to the quick ratio.
D. The accuracy of a cash flow forecast is inversely related to the forecast horizon.

What of the following is not liability?

A. Note payable
B. Unearned revenue
C. Retained Earnings
D. Account Payable
What of the following is asset?
A. Prepaid expenses
B. Stock
C. Revenue
D. Wage Expense
Calculation of straight line deprecation, double declining method
Calculation of LIFO and FIFO method
Also use midterm as study material