multiple choice question Flashcards
(16 cards)
Which of the following ratios is least similar to the others in the list?
A. Receivables turnover ratio
B. Payables turnover ratio
C. Fixed asset turnover ratio
D. Total asset turnover ratio
B. Payables turnover ratio
An analyst observes a decrease in a company’s inventory turnover. Which of the
following would most likely explain this trend?
A. The company installed a new inventory management system, allowing
more eficient inventory management.
B. Due to problems with obsolescent inventory last year, the company wrote
off a large amount of its inventory at the beginning of the period.
C. The company installed a new inventory management system but experienced some operational difficulty, resulting in duplicate orders being
placed with suppliers.
D. None of the above
C. The company installed a new inventory management system but
experienced some operational difficulty, resulting in duplicate orders being
placed with suppliers.
Question 3
Which of the following is likely to be true?
A. Tax burden ratio usually is more than 1
B. Interest burden ratio can never exceed 1
C. Operating profit margin = Tax burden x interest burden x EBIT margin
D. none of the above
D. none of the above’
Reason:
NP is bigger than interest expense. Net proit margin = Tax burden x interest burden x
EBIT margin. So in general, C is unlikely to be true.
Comparison of a company’s inancial results to other peer companies’ for the
same time period is called:
A. horizontal analysis
B. cross-sectional analysis
C. trend analysis
D. technical analysis
Cross sectional analysis
as cross sectional analysis involves analysis between companies in the same period
Question 6
Which of the following are components of Altman Z-score?
(i) working capital to total assets
(ii) market value of stock to book value of total equity
(iii) asset turnover
A. Only (i) and (ii)
B. Only (ii) and (iii)
C. Only (i) and (iii)
D. All of (i), (ii), and (iii)
C. Only (i) and (iii)
consider the situations below:
i. Determine the credit rating of a company
ii. Determine which accounts require extra audit attention
iii. Select an internal auditor for a company
Which of the following is a set of economic decision examples where inancial
statement analysis can guide better decision making?
A. (i) and (ii)
B. (ii) and (iii)
C. (iii) and (i)
D. Each set of the above
A. (i) and (ii)
Question 8
The most stringent test of a company’s liquidity is its:
A. quick ratio
B. debt-to-equity ratio
C. cash ratio
D. current ratio
C. cash ratio
The debt-to-equity ratio is not a liquidity ratio. The cash ratio determines how much of a company’s near-term obligations can be settled with existing amounts of cash and marketable securities
Question 9
In conducting the financial statement analysis of a company, which of the
following is an information source from outside the company that may be used to
obtain relevant data?
(i) press releases
(ii) industry reports
(iii) economic statistics
A. Only (i) and (ii)
B. Only (ii) and (iii)
C. Only (i) and (iii)
D. All of (i), (ii), and (iii)
B. Only (ii) and (iii)
Much of the information will come from outside the company, e.g.,
economic statistics
industry reports
databases about competitors
Some other information will come from the company,e.g.,
press releases
conference calls
formula for interest burden ratio
EBT (Profit before tax)/EBIT (EBIT+Finance cost- charge related to finance cost)
- An unexpectedly large reduction in the unearned revenue
account is most likely a sign that the company
A. Adopted more conservative revenue recognition practices
B. Overstated revenue in prior periods
C. Accelerated revenue recognition
C. Accelerated revenue recognition
- The part of current accruals arising from normal
operating activities unrelated to earnings management is
referred to as
A. Discretionary current accruals
B. Cash-low-based accurals ratio
C. Non-discretionary current accruals
D. Abnormal accruals
C. Non-discretionary current accruals
- Which of the following is least likely to be a warning sign of manipulated revenue?
A. A large decrease in deferred revenue
B. A large increase in accounts receivable
C. A large decrease in the allowance for doubtful accounts
C. A large decrease in the allowance for doubtful accounts
- Which of the following is an expectation/market-related motivation for accounting manipulation?
A. Avoid violating covenants in bond agreements
B. Minimize tax by private companies
C. Avoid management turover due to poor performance
D. None of the others
D. None of the others
- A sudden rise in inventory balances is least likely to be a
warning sign of
A. Understated expenses
B. Accelerated revenue recognition
C. Ineficient working capital management
B. Accelerated revenue recognition
- Reported revenue is most likely to have been reduced by
management’s discretionary estimate of
A. Inventory damage and theft
B. Uncollectible accounts
C. Sales returns and allowances
C. Sales returns and allowances
- Which of the following mechanisms is least likely to
discourage management manipulation of earnings?
A. Incentive compensation with cash bonus and stock options
B. Debt covenants
C. Securities regulators
D. Both A and B
D. Both A and B
