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    Five Questions about reading a financial statement

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    1. Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy?
    A) auditor
    B) management discussion and analysis
    C) proxy statement
    D) Footnotes

    2. Which of the following would not be considered a source of financing?
    A) notes receivable
    B) common stockholders' equity
    C) retained earnings
    D) capital lease obligations

    3.Wilco Company reports the following
    2005 2004
    Retained Earnings $2,000,000 $1,300,000
    Common Stock 500,000 500,000
    Paid-in Capital 3,000,000 3,000,000
    Net Income for year 900,000 400,000

    Dividend payout ratio for 2005 was:
    A) 27%
    B) 12%
    C) 22.2%
    D) Not determinable

    4. If a company receives an unqualified audit opinion it means the auditors:
    A)did not complete a full audit and therefore do not feel qualified to give an opinion on
    financial statements.
    B) are providing assurance that the company will remain financially viable for at least the next year
    C) are providing assurance that the company's financial statements fairly present company's financial performance and position.
    D) Are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.

    5. The Management Discussion and Analysis Section of the annual report:
    A) is required by the SEC
    B) is optional but normally included in the annual report
    C) is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company
    D) is required by the SEC only if they have a qualified audit opinion..

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    Solution Preview

    1. B) Management discussion and analysis is the best source for future plans. Proxy and footnotes mostly deal with the past, and the auditor is not a source at all.

    2. C) Retained earnings in itself would not be a source, but the bank might not approve a loan without positive retained earnings. ...

    Solution Summary

    The solution selects the best answer to the questions and provides a sentence or two of reasoning and explanation for the choice of answers.