Financial Statement Analysis (D366)
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Free Financial Statement Analysis (D366) Questions
If BBC Company received an additional advance payment of $4,500 on February 1, Year 5, for services to be performed over the next two years, what would be the total liabilities reported on the December 31, Year 5 balance sheet, assuming the previous advance payment is fully recognized by then?
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$4,500
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$3,575
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$4,575
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$8,075
Explanation
Explanation:
Advance payments are recorded as liabilities until services are performed. The $4,500 received on February 1, Year 5, covers two years. By December 31, Year 5, 11/24 of the advance has been earned (for the 11 months in Year 5), leaving 13/24 unearned as a liability. Calculating the remaining liability: $4,500 × (13/24) = $2,437.50. If the previous advance is fully recognized, only the remaining portion from the new advance is reported. The total liability would be rounded based on the options provided, so the closest is $3,575.
Correct Answer:
$3,575
Which of the following calculations can be used to measure a company's degree of operating leverage?
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Contribution margin ÷ sales.
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Contribution margin ÷ net income
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Sales ÷ contribution margin.
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Sales ÷ net income
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Sales ÷ fixed costs
Explanation
Explanation:
The degree of operating leverage (DOL) measures how sensitive a company’s operating income is to changes in sales. It is calculated as contribution margin divided by net income. This ratio indicates how a percentage change in sales will impact operating profit, helping management understand the risk associated with fixed costs and operational leverage in their cost structure.
Correct Answer:
Contribution margin ÷ net income
How do significant noncash expenses typically affect a company's cash flow-to-net income ratio?
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Greater than 1
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Equal to 1
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Less than 1
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None of these are correct
Explanation
Explanation:
Noncash expenses, such as depreciation or amortization, reduce net income but do not affect actual cash flow from operations. When these expenses are significant, cash generated from operations exceeds net income, causing the cash flow-to-net income ratio to be greater than 1. This indicates strong cash backing for reported earnings and reflects the quality of a company’s earnings.
Correct Answer:
Greater than 1
Which statement best describes the purpose of a statement of cash flows?
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It provides a detailed account of a company's revenues and expenses over a period.
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It summarizes the cash inflows and outflows from operating, investing, and financing activities.
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It presents the company's financial position at a specific point in time.
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It shows the changes in equity from transactions with shareholders.
Explanation
Explanation:
The statement of cash flows provides a summary of a company’s cash inflows and outflows categorized into operating, investing, and financing activities. This statement helps stakeholders understand how cash is generated and used, assess liquidity and financial flexibility, and evaluate the company’s ability to meet obligations and fund future growth, which cannot be fully captured by income statements or balance sheets alone.
Correct Answer:
It summarizes the cash inflows and outflows from operating, investing, and financing activities
A corporation that has issued only common stock and has not engaged in any transactions involving convertible securities during the fiscal year will have which of the following characteristics regarding its earnings per share (EPS) calculations under both IFRS and US GAAP?
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Basic EPS is higher than diluted EPS
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Diluted EPS cannot be calculated
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Basic EPS equals diluted EPS
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The capital structure is classified as complex
Explanation
Explanation:
When a corporation has only common stock and no convertible or dilutive securities, there is no potential dilution of earnings. As a result, basic EPS and diluted EPS are identical because there are no additional securities that could increase the number of shares outstanding. The capital structure in this case is considered simple, not complex.
Correct Answer:
Basic EPS equals diluted EPS
Explain how the insurance policy payment affects Flavin Co.'s financial statements over the coverage period.
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It is recorded as an expense immediately and does not affect future periods.
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It is recorded as an asset and expensed monthly over the coverage period.
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It is recorded as a liability until the coverage period ends.
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It is recorded as revenue until the coverage period is completed.
Explanation
Explanation:
When an insurance policy is paid in advance, the payment is initially recorded as a prepaid expense (asset). Over the coverage period, a portion of this asset is expensed monthly to match the insurance cost to the periods benefiting from the coverage. This ensures proper application of the matching principle and accurate reflection of expenses in each period.
Correct Answer:
It is recorded as an asset and expensed monthly over the coverage period.
Financial statement analysis serves the following purposes: which one is it?
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Prognosis
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Diagnosis
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Neither diagnosis nor prognosis
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Both diagnosis and prognosis
Explanation
Explanation:
Financial statement analysis serves both diagnostic and prognostic purposes. Diagnosis involves evaluating the current and past financial performance to identify strengths, weaknesses, and problem areas. Prognosis uses historical and current data to predict future performance and financial condition, aiding stakeholders in making informed investment, lending, and strategic decisions.
Correct Answer:
Both diagnosis and prognosis
Management disclosure of the likely impact of implementing recently issued accounting standards is least likely to:
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conclude that the standard will not affect the financial statements materially.
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state that the impact of the standard is impossible to determine.
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conclude that the standard does not apply.
Explanation
Explanation:
Management disclosures are intended to provide transparency regarding the potential effects of new accounting standards. While it is reasonable to indicate that the standard will not have a material impact or that the impact is uncertain, it is least likely for management to conclude that the standard does not apply at all, as the applicability of standards is determined based on the company’s operations and circumstances.
Correct Answer:
conclude that the standard does not apply.
In a common-size balance sheet, when applying the percent of total assets method, each item is generally represented as a percentage of what?
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Total assets
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Total liabilities
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Total equity
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Net income
Explanation
Explanation:
In a common-size balance sheet using the percent of total assets method, each line item is expressed as a percentage of total assets. This standardization allows for easy comparison across companies of different sizes or for analyzing trends over time. By converting absolute numbers into percentages, analysts can evaluate the relative weight of assets, liabilities, and equity in the company’s financial structure.
Correct Answer:
Total assets
Elements directly related to the measurement of financial position in the balance sheet does not include:
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Expenses
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Liabilities
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Equity
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Assets
Explanation
Explanation:
Financial position is represented by the company’s assets, liabilities, and equity, which are reported on the balance sheet. Expenses are elements of financial performance, not financial position. They are used to calculate net income over a period but do not directly describe what the company owns or owes at a specific point in time.
Correct Answer:
Expenses
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