Financial Statement Analysis (D366)
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Free Financial Statement Analysis (D366) Questions
Historical cost is the
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Amount of cash or cash equivalent paid or fair value of the consideration given at the same time of acquisition
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Amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired currently
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Amount of cash or cash equivalent that could currently be obtained by selling the asset in an orderly disposal.
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Discounted value of the future net cash inflows that an item is expected to generate in the normal course of business
Explanation
Explanation:
Historical cost refers to the original cash or cash-equivalent amount paid to acquire an asset, or the fair value of the consideration given at the time of acquisition. It provides an objective and verifiable measurement basis for recording assets and ensures consistency in accounting, although it does not reflect current market values or potential future cash flows.
Correct Answer:
Amount of cash or cash equivalent paid or fair value of the consideration given at the same time of acquisition
On October 1, 2012, the Jernigan Company paid $4,800 for a one-year insurance policy. On December 31, 2012, the adjusting entry would include a:
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debit to Insurance Expense, $3,600.
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credit to Insurance Payable, $1,200
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credit to Prepaid Insurance, $1,200.
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debit to Insurance Expense, $4,000.
Explanation
Explanation:
The insurance policy covers 12 months, costing $4,800, so the monthly expense is $4,800 ÷ 12 = $400. For October through December (3 months), the insurance expense is 3 × $400 = \(1,200 per month? Wait, check carefully: 3 × 400 = 1,200. Yes,\)1,200 total for 3 months? Actually, 3 × 400 = 1,200, correct.
The adjusting entry on December 31 reduces the prepaid insurance (asset) by \(1,200 and records Insurance Expense (debit) for the same amount. Correct Answer: credit to Prepaid Insurance,\)1,200
A company has convertible preferred stock outstanding. In the computation of diluted earnings per share, common shares issued when convertible preferred stock is converted are added to the denominator of the basic EPS equation, and the numerator is:
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adjusted by adding back convertible preferred stock dividends
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adjusted by adding back non-convertible preferred stock dividends.
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not adjusted
Explanation
Explanation:
In diluted EPS calculations, the numerator (net income) is adjusted by adding back preferred dividends associated with convertible preferred stock because these dividends would no longer be paid if the preferred shares are converted into common stock. This adjustment ensures that the diluted EPS reflects the income available to all potential common shareholders.
Correct Answer:
adjusted by adding back convertible preferred stock dividends.
Which of the following factors is least likely to affect the selection of analytical measures used in financial statement analysis?
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Nature of the company's business model
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Geographic market presence
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Variability in financial reporting standards
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Management's strategic objectives
Explanation
Explanation:
The selection of analytical measures in financial statement analysis is influenced by the company’s operations, reporting standards, and strategic goals. Factors such as the business model, reporting variability, and management objectives guide which ratios or metrics are most meaningful. Geographic market presence, however, generally does not directly determine which financial measures are chosen, making it the least likely factor to affect analytical selection.
Correct Answer:
Geographic market presence
Explain how borrowing money affects the cash flow statement for ABC Company. What type of cash flow is recorded when the company borrows funds?
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It records an inflow from investing activities.
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It records an inflow from financing activities
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It records an outflow from operating activities
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It records an outflow from operating activities
Explanation
Explanation:
When ABC Company borrows funds, it receives cash from lenders, which increases its cash balance. This transaction is classified as a financing activity on the cash flow statement because it relates to obtaining capital from external sources to finance operations or investments. It is recorded as a cash inflow in the financing section.
Correct Answer:
It records an inflow from financing activities.
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.
A transaction increased a company's assets by $5,000 and increased its liabilities by $5,000. This transaction could have been a(n)
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a note payable issued to a creditor in exchange for a loan.
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receipt of cash in exchange for performing services to a customer.
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payment of rent for the month
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payment for a one-year insurance policy that will expire next year.
Explanation
Explanation:
When a company issues a note payable to a creditor, it receives cash or another asset, increasing total assets. Simultaneously, the obligation to repay the loan increases liabilities by the same amount. This type of transaction affects both the asset and liability sides of the balance sheet equally without impacting equity.
Correct Answer:
a note payable issued to a creditor in exchange for a loan.
Noncash items are expenses that directly affect Blank______ but do not directly affect Blank______.
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net income; cash flow
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cash flow; taxes
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cash flow; revenue
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cash flow; net income
Explanation
Explanation:
Noncash items, like depreciation and amortization, reduce net income reported on the income statement but do not involve an actual outflow of cash. Therefore, they directly affect net income while leaving cash flow from operations unchanged. These adjustments are critical in analyzing cash-based performance and determining the real liquidity position of a company.
Correct Answer:
net income; cash flow
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
Rules-based and principles-based approaches to standard setting are:
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each used for specific industries.
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examples of coherent financial reporting frameworks.
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an example of barriers to creating a coherent financial reporting framework
Explanation
Explanation:
Rules-based and principles-based approaches represent two different methods for developing accounting standards. Principles-based frameworks focus on broad guidelines and objectives, allowing professional judgment, whereas rules-based frameworks provide detailed, specific instructions. Both approaches are examples of coherent financial reporting frameworks, providing structure and consistency in financial reporting.
Correct Answer:
examples of coherent financial reporting frameworks.
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