Financial Statement Analysis MCQ Questions With Answers Part 9

Q1- The following is a significant limitation of balance sheets in financial analysis:

A. It is possible to measure different balance sheet items in different ways.

B. Information from other financial statements is required for the calculation of the liquidity and solvency ratios.

C. It is possible for some items to be recognized even when they do not appear to be associated with any flow of economic benefits.

Correct Answer: A

Explanation: A variety of measurement bases may be used to calculate balance sheet values (historical cost, fair value, etc.). As a result, the value of assets, liabilities, and equity on the balance sheet may differ from their intrinsic values on the books. Accountants use balance sheets to gather the information they need to calculate a company's solvency and liquidity ratios. Items are recorded on the balance sheet only if there is a reasonable expectation of a future flow of economic benefits to or from the company.

Q2- The following documents are to contain information about a company's revenue recognition policies:

A. Management Discussion & Analysis.

B. Supplementary schedules.

C. Financial statement footnotes.

Correct Answer: C

Explanation: Footnotes to financial statements are frequently used to provide information about the company's accounting policies and procedures.

Q3- The ability of a company to meet its financial obligations is referred to as its solvency.

A. Meet its short-term obligations.

B. The company needs to sell its inventory at market prices in a short amount of time.

C. Meet its long-term obligations.

Correct Answer: C

Explanation: The ability of a company to meet its long-term obligations is referred to as its solvency.

Q4- If a user requires information about significant corporate events, analysts should consult

A. Form 144.

B. Form 6-K.

C. Form 8-K.

Correct Answer: C

Explanation: Form 8-K is used to report material corporate events that have occurred recently on a more timely basis. Form 144 is filed with the Securities and Exchange Commission (SEC) to disclose a proposed sale of restricted securities. Non-U.S. companies use Form 6-K to submit certain financial information to the Securities and Exchange Commission twice a year.

Q5- Of the following transactions, which one is to be recorded on a company's statement of changes in equity:

A. Purchasing a machine from a dealer in heavy equipment.

B. The declaration of a dividend on common stock.

C. Investing cash in an exchange-traded fund.

Correct Answer: B

Explanation: Upon declaring a dividend, the amount of shareholders' equity decreases, which is reflected on the statement of changes in shareholders' equity. The purchase of a machine is unlikely to result in a change in the equity of shareholders at the time of purchase. Investing cash in a security represents an exchange of one asset for another, and it is unlikely to result in a change in the equity of the company's shareholders at the time of the investment.

Q6- Identify which of the following businesses has the lowest level of creditworthiness.

A. A company with a high current ratio

B. A company with a high number of days of receivables

C. A company with a high inventory turnover

Correct Answer: B

Explanation: A long collection period may indicate that customers are paying late or that the company's capital is being held in accounts receivable at a disproportionately high level.

Q8- Which of the following methods should be used to conduct trend analysis is correct?

A. Horizontal common-size financial statements

B. Vertical common-size financial statements

C. Pie charts

Correct Answer: A

Explanation: In order to evaluate a company's past performance and prepare forecasts, horizontal common-size financial statements are prepared to look for trends over time in the company's financial statements.

Q9- According to this definition, which of the following is a distinguishable intangible asset?

A. Trademarks

B. Land and buildings

C. Goodwill

Correct Answer: A

Explanation: Land and buildings are examples of tangible assets, whereas goodwill is an intangible asset that cannot be quantified.

Q10- A higher turnover of working capital indicates the following:

A. Higher operating efficiency.

B. Poor liquidity management.

C. Lower operating efficiency.

Correct Answer: A

Explanation: In general, a higher working capital turnover ratio indicates that the company is generating revenue from its working capital as efficiently as possible.

Q11- If you want to convert a horizontal income statement into a vertical common-size income statement, each line item should be expressed as a percentage of the following amounts:

A. Revenue.

B. Pretax income.

C. Net income.

Correct Answer: A

Explanation: An income statement in vertical common-size format expresses each item as a percentage of total revenue.

Q12- Unearned revenue are classified as an

A. Asset.

B. Liability.

C. Owners’ equity.

Correct Answer: B

Explanation: Unearned revenue is income received in advance of the provision of a good or service; the entity still has to provide the good or service. As a result, unearned revenue is considered a liability.

Q13- For a company, which of the following is a major source of cash?

A. An increase in accounts receivable

B. A decrease in accounts payable

C. An increase in wages payable

Correct Answer: C

Explanation: An increase in the amount of wages due (liability) is a source of funds.

Q14- According to this list, which of the following financial statement elements is incorrect to be related to the measurement of performance?

A. Income

B. Expenses

C. Assets

Correct Answer: C

Explanation: Income and expenses are related to the measurement of financial performance, whereas assets, liabilities, and equity are related to the measurement of financial position (or the state of the financial institution).

Q15- When considering the impact of warrants on earnings per share, which method is used to calculate the number of shares added to the denominator when calculating the number of shares added to the denominator?

A. Cost recovery method.

B. Weighted average method.

C. Treasury Stock method.

Correct Answer: C

Explanation: For purposes of the treasury stock method, it is presumed that any hypothetical funds received by the company as a result of the exercise of options are used to purchase shares of the company's common stock on a stock exchange at the average market price.

Q16- Is it possible to identify which of these statements regarding the calculation of earnings per share (EPS) is incorrect?

A. It is possible that the options that are still outstanding will have no impact on diluted EPS.

B. After a stock split, any new shares issued must be adjusted to reflect the split.

C. From the date of reacquisition, shares that have been acquired are excluded from the calculation.

Correct Answer: B

Explanation: Because they are already "new" shares, shares issued after the split do not need to be adjusted for the split. Exercising options at a price greater than the average share price has no effect on diluted earnings per share.

Q17- Which of the following statements about a financial sector ratio is incorrect?

A. Capital adequacy

B. Net interest margin

C. Sales from the same store that were transmitted without the publisher's permission. Violations will result in legal action.

Correct Answer: C

Explanation: Same-store sales is a ratio that is used to analyze the performance of retailers in a given period of time.

Q18- The following would be the classification for the sale of obsolete equipment:

A. financing cash flow.

B. investing cash flow.

C. operating cash flow.

Correct Answer: B

Explanation: Investing cash flow is what is meant by the sale of machinery and equipment.

Q19- According to the classification of the balance sheet, assets and liabilities are divided into the following categories:

A. Current or non-current items.

B. Internally generated or acquired.

C. Measured at cost or fair value.

Correct Answer: A

Explanation: There are four categories of balance sheets on classified balance sheets: current assets, non-current assets, current liabilities, and non-current liabilities.

Q20- The difference between the current ratio and the quick ratio is that the quick ratio does not include the following components:

A. marketable securities.

B. inventory.

C. non-current assets.

Correct Answer: B

Explanation: Current ratio = current assets / current liabilities

Quick ratio = (current assets – inventories) / current liabilities

Marketable securities are included in both the current assets and the long-term assets categories. Neither ratio takes non-current assets into account.

Q21- Which of the following ratios is used to assess a company's internal liquidity?

A. Total asset turnover.

B. Interest coverage.

C. Current ratio.

Correct Answer: C

Explanation: The total asset turnover of a company measures its operating efficiency, and the interest coverage of a company measures its financial risk.

Q22- Revenues are recognized under accrual accounting in the same period in which the associated expenses are paid.

A. Expenses are incurred.

B. Cash is collected.

C. Invoices are billed.

Correct Answer: A

Explanation: According to the matching principle, revenues are recognized in the same period that the expenses incurred to generate those revenues are incurred. Accrual accounting is based on the matching principle.

Q23- How would a stock split most likely be reported on the statement of cash flows?

A. Disclosed in the footnotes.

B. Reported in cash flows from operations.

C. Reported in cash flows from financing.

Correct Answer: A

Explanation: A stock split does not result in any cash being exchanged. If a stock split is mentioned in the statement of cash flows, it will be disclosed as a noncash transaction in the footnotes of the statement of cash flows.