Financial Statement Analysis (D366)
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Free Financial Statement Analysis (D366) Questions
Which of the following ratios is primarily used to assess a company's short-term financial health and ability to meet its current obligations?
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Quick ratio
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Debt-to-equity ratio
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Current ratio
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Return on assets
Explanation
Explanation:
The current ratio is a liquidity measure that assesses a company’s ability to pay its short-term liabilities using its current assets. It provides insight into the firm’s short-term financial health and operational efficiency. While the quick ratio is similar, the current ratio includes all current assets, making it a broader indicator of the ability to meet obligations.
Correct Answer:
Current ratio
If Y Company had the same beginning assets and liabilities as X Company but earned revenue of $900, incurred expenses of $600, and paid dividends of $150 during the year, what would be the net income for Y Company?
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$150
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$300
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$250
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$450
Explanation
Explanation:
Net income is calculated as total revenues minus total expenses. Here, Net Income = $900 − $600 = $300. Dividends do not affect net income; they are distributions of earnings to shareholders and reduce retained earnings, not the calculation of net income.
Correct Answer:
$300
Interim financial reports released by a company are most likely to be:
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unaudited
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weekly
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unqualified
Explanation
Explanation:
Interim financial reports, issued between annual reporting periods, are typically unaudited. They provide timely updates on a company’s financial performance and position, helping investors and management monitor progress. While useful for decision-making, they do not undergo the full audit procedures applied to annual financial statements.
Correct Answer:
unaudited.
A company with weighted average diluted shares outstanding of 30 million, basic shares outstanding of 29 million, and net income of $60 million would have diluted earnings per share of
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$6.00
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$3.00
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$2.07
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$2.00
Explanation
Explanation:
Diluted earnings per share (EPS) is calculated by dividing net income by the weighted average diluted shares outstanding. Here, Diluted EPS = $60,000,000 ÷ 30,000,000 = $2.00. This accounts for potential dilution from convertible securities or stock options, reflecting the earnings available per share if all convertible instruments were exercised.
Correct Answer:
$2.00
What is DuPont analysis?
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A specialized set of financial ratios
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Financial ratio analysis for chemical firms
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It separates profitability ratios into component parts
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It relates changes in sales to changes in balance sheet assets
Explanation
Explanation:
DuPont analysis is a method that breaks down return on equity (ROE) into its component parts: profit margin, asset turnover, and financial leverage. This decomposition allows analysts to identify the key drivers of a company’s profitability and understand how operational efficiency, asset use, and leverage contribute to overall equity returns.
Correct Answer:
It separates profitability ratios into component parts
A type of analysis that allows comparison of financial statements for companies of different sizes is called:
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Comparable financial statement
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Horizontal financial statement
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Common-size statement
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Dependable financial statement
Explanation
Explanation:
Common-size financial statements standardize each line item as a percentage of a base figure, such as total assets or sales. This allows analysts to compare companies of different sizes on a proportional basis, focusing on relative financial structure, efficiency, and performance rather than absolute dollar amounts, which can be misleading in cross-company comparisons.
Correct Answer:
Common-size statement
Under IFRS, a gain from the sale of a segment of a business that has been classified as held for sale would most likely be reported as:
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continuing operations
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discontinued operations
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other comprehensive income
Explanation
Explanation:
Under IFRS, gains or losses from a business segment classified as held for sale are reported as discontinued operations. This separate reporting allows users to distinguish between the results of ongoing operations and those of segments that are being disposed of, providing clearer insight into the company’s continuing performance.
Correct Answer:
discontinued operations
Expenses paid in cash and recorded as assets before they are used are called:
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accrued expenses
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advance purchases
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prepaid expenses
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unearned expenses
Explanation
Explanation:
Prepaid expenses are payments made in advance for goods or services that will provide future economic benefits. These payments are recorded as assets initially and then expensed over the periods in which the benefits are realized. This treatment ensures proper matching of expenses with the periods they benefit, in accordance with the accrual basis of accounting.
Correct Answer:
prepaid expenses
At the start of 2010, Steel Works acquired a new piece of equipment for $800,000. The equipment is expected to have a useful life of 8 years and a residual value of $100,000. What amount of depreciation expense will Steel Works report for the year 2010 using the double-declining balance method?
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$100,000
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$200,000
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$150,000
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$175,000
Explanation
Explanation:
Double-declining balance (DDB) depreciation is an accelerated method. The rate is twice the straight-line rate. Straight-line rate = 1 ÷ 8 = 12.5%; DDB rate = 25%. Depreciation expense for 2010 = 25% × $800,000 = $200,000. Residual value is ignored in DDB calculation until the final year, so the first-year depreciation is based solely on the book value.
Correct Answer:
$200,000
At the conclusion of an accounting period, if a company has received goods or services but has not yet made the cash payment, it should recognize:
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an accrued liability, an asset.
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a deferred expense, a liability.
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an accrued expense, a liability
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a prepaid expense, an asset.
Explanation
Explanation:
An accrued expense arises when a company has received goods or services but has not yet paid for them. It represents a present obligation to settle the liability in the future, making it a liability on the balance sheet. Recognizing accrued expenses ensures that expenses are recorded in the period in which they are incurred, adhering to the accrual accounting principle.
Correct Answer:
an accrued expense, a liability
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