Introduction to Financial Statement Analysis quiz Financial Analysis Quiz On Mar 14, 2024 Share /30 123456789101112131415161718192021222324252627282930 Introduction to Financial Statement Analysis 30 questions in 30 minutes Answers at the end of the exam Pass Score 70% The questions change when you repeat the exam enter full-screen mode by pressing the icon located in the top- right comer of the exam 1 / 30 According to the IASB, which of the following least accurately describes financial reporting? Financial reporting : is useful to a wide range of users uses the information in a company’s financial statements to make economic decisions provides information about changes in financial position of an entity The role of financial reporting is described by the International Accounting Standards Board (IASB) in its "Framework for the Preparation and Presentation of Financial Statements" : The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions . Using the information in a company's financial statements to make economic decisions is financial analysis, not financial reporting . 2 / 30 What type of audit opinion is preferred when analyzing financial statements ? Qualified Adverse Unqualified An unqualified opinion is a “clean” opinion and indicates that the financial statements present the company’s performance and financial position fairly in accordance with a specified set of accounting standards . 3 / 30 A company's operating revenues for a reporting period are most likely to be shown on its : cash flow statement income statement balance sheet Revenues for a reporting period are presented on a company's income statement. They can be, but are not required to be, classified as operating and nonoperating revenues. Cash from operating activities is presented on the company's statement of cash flows, but this is not necessarily equal to operating revenues because revenue might be recognized in a different period than cash is collected. The balance sheet displays a company's financial position at a fixed point in time . 4 / 30 Information about a company’s objectives, strategies, and significant risks are most likely to be found in the : management commentary notes to the financial statements auditor’s report These are components of management commentary. 5 / 30 Which of the following sources of information used by analysts is found outside a company’s annual report? Management’s discussion and analysis Peer company analysis Auditor’s report When performing financial statement analysis, analysts should review all company sources of information as well as information from external sources regarding the economy, the industry, the company, and peer (comparable) companies . 6 / 30 Which financial statement reports information about a company's financial position at a single point in time ? income statement cash flow statement balance sheet The balance sheet reports a company's financial position at a point in time. In contrast, the income statement and the cash flow statement report a company's financial performance over a reporting period . 7 / 30 A company’s profitability over a period of time is best evaluated using the: cash flow statement balance sheet income statement A company’s profitability is best evaluated using the income statement. The income statement presents information on the financial results of a company’s business activities over a period of time by communicating how much revenue was generated and the expenses incurred to generate that revenue . 8 / 30 Which of the following is least likely to be considered a role of financial statement analysis ? To make economic decisions Determining whether to invest in the company's securities Assessing the management skill of the company’s executives The role of financial statement analysis is to use the information in a company's financial statements, along with other relevant information, to make economic decisions. Examples of such decisions include whether to invest in the company's securities or recommend them to other investors, or whether to extend trade or bank credit to the company. Although the financial statements might provide indirect evidence about the management skill of the company's executives, that is not generally considered the role of financial statement analysis . 9 / 30 Which of the following most likely results in an increase of owners’ equity ? New equity issuance Share repurchase Cash dividend The basic components of owners’ equity are paid-in capital and retained earnings. In the paid-in capital account, an example of an increase in owners’ equity is a new equity issuance. Cash dividends reduce retained earnings and owners’ equity. Share repurchases reduce paid-in capital and owners’ equity. (Share repurchase ) is incorrect because for the paid-in capital account an example of a decrease in owners’ equity is the repurchase of previously issued shares. (Cash dividend) is incorrect because a cash dividend payment is the most common cause of a decrease in owners’ equity. 10 / 30 Which of the following statements about proxy statements is least accurate? Proxy statements are: available on the EDGAR web site a good source of information about the qualifications of board members and management not filed with the SEC Proxy statements are issued to shareholders when there are matters that require a shareholder vote. These statements, which are also filed with the SEC and available from EDGAR, are a good source of information about the election of (and qualifications of) board members, compensation, management qualifications, and the issuance of stock options. 11 / 30 Which of the following statements concerning the notes to the audited financial statements of a company is least accurate ? Financial statement notes : include management's assessment of the company's operating performance and financial results contain information about contingent losses that may occur are audited Management's perspective on the company's results is provided in the Management's Discussion and Analysis supplement to the financial statements. Financial statement notes (footnotes) provide information about matters such as the company's accounting methods and assumptions, contingencies, and acquisitions and disposals. Footnotes to the financial statements are audited . 12 / 30 Ratios are an input into which step in the financial statement analysis framework ? Collect input data Process data Analyze/interpret the processed data Ratios are an output of the process data step but are an input into the analyze/interpret data step . 13 / 30 An independent audit report is most likely to provide : a qualified opinion with respect to the transparency of the financial statements absolute assurance about the accuracy of the financial statements reasonable assurance that the financial statements are fairly presented The independent audit report provides reasonable assurance that the financial statements are fairly presented, meaning that there is a high probability that the audited financial statements are free from material error, fraud, or illegal acts that have a direct effect on the financial statements. 14 / 30 Updated information on a company’s performance and financial position since the last annual report is most likely found in : management discussion and analysis interim reports proxy statements Interim reports, either quarterly or semi-annual, contain updated information on a company’s performance and financial position since the last annual report. (management discussion and analysis) is incorrect . The MD&A is part of the annual report and is not an update since the last annual report . (proxy statements) is incorrect . Proxy statements contain information about matters that will be put to a vote at shareholders’ meetings . 15 / 30 Interim reports most likely : include a full set of financial statements and notes are issued semi-annually or quarterly are audited Interim reports are provided semi-annually or quarterly, depending on applicable regulatory requirements. (are audited) is incorrect. Interim reports are not audited. (include a full set of financial statements and notes) is incorrect. Interim reports generally present the four basic financial statements and condensed notes. 16 / 30 Accounting policies, methods, and estimates used in preparing financial statements are most likely to be found in the : management commentary notes to the financial statements auditor’s report The notes disclose choices in accounting policies, methods, and estimates . 17 / 30 Information about management and director compensation are least likely to be found in the : auditor’s report notes to the financial statements proxy statement Information about management and director compensation is not found in the auditor’s report. Disclosure of management compensation is required in the proxy statement, and some aspects of management compensation are disclosed in the notes to the financial statements. 18 / 30 Which of the following would NOT require an explanatory paragraph added to the auditors' report? Statements that the financial information was prepared according to GAAP Doubt regarding the "going concern" assumption Uncertainty due to litigation The statements that the financial information was prepared according to GAAP should be included in the regular part of the auditors' report and not as an explanatory paragraph. The other information would be contained in explanatory paragraphs added to the auditors' report. 19 / 30 An analyst who wants to examine a firm's financing transactions during the most recent period is most likely to evaluate the firm's statement of : cash flows Fnancial position comprehensive income The statement of cash flows describes a firm's inflows and outflows of cash during a reporting period from operating, investing, and financing activities. Financing transactions such as issuance of debt or stock are shown on the statement of cash flows. The statement of financial position (balance sheet) presents the firm's assets, liabilities, and equity at a point in time. The statement of comprehensive income (income statement) does not directly reflect a firm's financing transactions. Cash raised is not included in a firm's revenues and dividends paid and debt principal repaid are not included in its expenses . 20 / 30 Which of the following is an analyst least likely to rely on as objective information to include in a company analysis ? Proxy statements Government agency statistical data on the economy and the company’s industry Corporate press releases Corporate reports and press releases are written by management and are often viewed as public relations or sales materials. An analyst should review information on the economy and the company's industry and compare the company to its competitors. This information can be acquired from sources such as trade journals, statistical reporting services, and government agencies. Securities and Exchange Commission (SEC) filings include Form 8-K, which a company must file to report events such as acquisitions and disposals of major assets or changes in its management or corporate governance and proxy statements, which are a good source of information about the election of (and qualifications of) board members, compensation, management qualifications, and the issuance of stock options. 21 / 30 Which of the following statements represents information at a specific point in time ? The balance sheet The income statement and the balance sheet The income statement The balance sheet represents information at a specific point in time. The income statement represents information over a period of time . 22 / 30 A firm's internal controls are most accurately described as : directly affecting the firm’s financial reporting quality a responsibility of the firm’s board of directors outside the scope of an audit report under IFRS and U.S. GAAP Weak internal controls provide an opportunity for low-quality or even fraudulent financial reporting. A firm's management, not its board of directors, is responsible for ensuring the effectiveness of a firm's internal controls. Under U.S. GAAP, auditors are required to state an opinion on a firm's internal controls. 23 / 30 Which of the following statements regarding footnotes to the financial statements is least accurate? Financial statement footnotes: provide information about assumptions and estimates used by management typically include a discussion of the firm’s past performance and future outlook may contain information regarding contingent losses Discussion of a firm's past performance and future outlook is most likely to be found in management's commentary. 24 / 30 In addition to the audited financial statements included in a firm's annual report, which of the following sources of information is most likely to contain audited data ? Management’s commentary Footnotes to the annual financial statements Interim financial statements filed with the SEC The footnotes are an integral part of the audited financial statements in a firm's annual report and are included in the audit opinion . 25 / 30 Reviewing the MD&A section of an annual report is important because : future revenue projections must be disclosed accounting policies may require subjective judgment by management management commentary is typically unaudited Companies should disclose in management commentary any critical accounting policies that require management to make subjective judgements that may have a significant impact on reported financial results. These subjective judgements should be carefully reviewed because they may materially alter an analyst’s conclusions about the future performance or financial position of a company (future revenue projections must be disclosed) is incorrect because companies are not required to disclose future revenue projections in the management’s discussion and analysis section of financial statements, but should highlight any favorable or unfavorable trends or uncertainties that may impact future performance or financial position. (management commentary is typically unaudited) is incorrect because although management commentary is typically unaudited, it is not a reason why management commentary is of importance to analysts. Rather, analysts should be aware that management commentary is unaudited and interpret accordingly. 26 / 30 For a company issuing securities in the United States to meet its obligations under the Sarbanes–Oxley Act, which of the following is management required to attest to ? The accuracy of estimates and assumptions used in preparing the financial statements The suitability of management and director compensation agreements The adequacy of internal control over financial reporting To be in compliance with Sarbanes–Oxley, it is mandatory that management’s Report to Shareholders discuss internal financial controls and their effectiveness, as well as the company’s auditor’s opinion of these internal controls. (The suitability of management and director compensation agreements) is incorrect. Information on management and director compensation agreements will be found in the proxy statement and/or notes to the financial statements. (The accuracy of estimates and assumptions used in preparing the financial statements) is incorrect. Estimates and assumptions used in preparing financial statements are found in the notes to the financial statements. 27 / 30 The step in the financial statement analysis framework that includes making any appropriate adjustments to the financial statements and calculating ratios is best described as: processing the data gathering the data analyzing and interpreting the data The financial statement analysis framework consists of six steps : 1. State the objective and context. Determine what questions the analysis is meant to answer, the form in which it needs to be presented, and what resources and how much time are available to perform the analysis. 2. Gather data. Acquire the company's financial statements and other relevant data on its industry and the economy. Ask questions of the company's management, suppliers, and customers, and visit company sites. 3. Process the data. Make any appropriate adjustments to the financial statements. Calculate ratios. Prepare exhibits such as graphs and common-size balance sheets. 4. Analyze and interpret the data. Use the data to answer the questions stated in the first step. Decide what conclusions or recommendations the information supports. 5. Report the conclusions or recommendations. Prepare a report and communicate it to its intended audience. Be sure the report and its dissemination comply with the Code and Standards that relate to investment analysis and recommendations. 6. Update the analysis. Repeat these steps periodically and change the conclusions or recommendations when necessary. 28 / 30 Which of the following best describes financial reporting and financial statement analysis? ) The objective of financial analysis is to provide information about the financial position of an entity that is useful to a wide range of users Financial reports assess a company’s past performance in order to draw conclusions about the company’s ability to generate cash and profits in the future Financial reporting refers to how companies show their financial performance and financial analysis refers to using the information to make economic decisions Financial reporting refers to the way companies show their financial performance to investors, creditors, and other interested parties by preparing and presenting financial statements. The objective of financial statements, not analysis, is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. The role of financial statement analysis, not reporting, is to use the information in a company's financial statements, along with other relevant information, to assess a company's past performance in order to draw conclusions about the company's ability to generate cash and profits in the future. 29 / 30 The step in the financial statement analysis framework of "processing the data" is least likely to include which activity? Making appropriate adjustments to the financial statements Acquiring the company’s financial statements Preparing exhibits such as graphs The financial statement analysis framework consists of six steps. Step 2: "Gather data" includes acquiring the company's financial statements and other relevant data on its industry and the economy. Step 3. "Process the data" includes activities such as making any appropriate adjustments to the financial statements and preparing exhibits such as graphs and common-size balance sheets. 30 / 30 Which of the following statements about financial statement analysis and reporting is least accurate ? Financial statement analysis focuses on the way companies show their financial performance to investors by preparing and presenting financial statements Providing information about changes in a company’s financial position is a role of financial reporting Deciding whether to recommend a company’s securities to investors is a role of financial statement analysis Financial reporting refers to the way companies show their financial performance to investors, creditors, and other interested parties by preparing and presenting financial statements, including information about changes in a company's financial position. The role of financial statement analysis is to use the information in a company's financial statements, along with other relevant information, to make economic decisions, such as whether to invest in the company's securities or recommend them to other investors. Analysts use financial statement data to evaluate a company's past performance and current financial position in order to form opinions about the company's ability to earn profits and generate cash flow in the future . Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback accounting and financial statement analysis examfinancial analysis testfinancial analysis test questions and answers