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    8 multl choice questions on Financial Statement Analysis

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    1. The new management of XYZ Inc. has increased the amount of their year-end expense accruals by over 25% compared to recent years, primarily in recording higher estimated future bad debts (bad debt expense). The most likely reason for this action is

    A) to increase net income this year to make the new management look good.
    B) to make net income higher in future periods.
    C) to maximize their bonus (based on stock price appreciation) for the current year.
    D) to reduce net income which will reduce federal income taxes payable and improve cash flows.

    2. Under current US GAAP, goodwill is:

    I. amortized over a period not to exceed 40 years
    II. tested annually for impairment
    III. exclusive of separately identifiable intangible assets
    IV. recorded only upon purchase of another entity

    A) I, II, III and IV
    B) II, III and IV
    C) I, II and III
    D) II and IV

    3. Companies are supposed to write-down value of assets if a permanent impairment of value or loss of utility occurs. If a company writes down its assets this year the effect on:

    This year's ROA Next year's ROA
    A) Increased No change
    B) Decreased No change
    C) Decreased Decreased
    D) Decreased Increased

    4. For a company with a current ratio of less than 1.0, which of the following accounting actions is most likely to increase its current ratio?

    A) Accruing direct labor costs.
    B) Making a cash payment on accounts payable.
    C) Paying off long-term debt.
    D) Leasing equipment under a long-term capital lease agreement.

    5. A company's current assets are $150 and its' current liabilities are $100. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio and return on assets ratio?

    A) Current Ratio: Increase; Return on Assets: Increase
    B) Current Ratio: Increase; Return on Assets: Decrease
    C) Current Ratio: Decrease; Return on Assets: Increase
    D) Current Ratio: Decrease; Return on Assets: Decrease

    6. Capitalizing interest costs will have which of the following effects on a company's financial statements after the initial period?

    A) Net earnings will be lower.
    B) Current ratio will increase.
    C) Total debt will be lower.
    D) Pretax cash flow will be lower

    7. Which of the following is not considered a monitoring mechanism?

    A) The Securities and Exchange Commission (SEC)
    B) Top level management
    C) The board of director's audit committee
    D) The external auditors

    8. If a company leases equipment to other companies and records these leases as operating leases rather than a capital leases, its:

    I. recorded liabilities will be lower
    II. recorded assets will be higher
    III. total cash flows will be higher
    IV. leverage ratios will be higher

    A) I and III
    B) II and IV
    C) I only
    D) II, III and IV

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    Solution Preview

    See the attached file.

    Update by OTA:

    For question 1, the student inquired about why D was not a good choice - to reduce income taxes and increase cash flow. The question indicated that the ...

    Solution Summary

    The solution presents explanations with each question as well as the answer.