Corporate Finance Reporting Quiz Questions

What are two ways to write the accounting equation? Assets = Liabilities + Owners Equity or Assets – Liabilities = Owners Equity
Sales for the year = $82,229, Net Income for the year= 8,186, and average Assets during the year = $52,445. Return on Assets (ROA) for the year is:A) 63.8%B) 1 0.0%C) 15.6%D) There is not enough information to calculate ROA.E) None of the above Answer: CRationale: ROA = Net Income /Average assets. Therefore ROA equals $8,186 / $52,445 = 15.6%.
In its 2011 annual report, Mattel Inc. reported the following (in millions):Total liabilities $3,061Total shareholders’ equity $2,611What proportion of Mattel is financed by nonowners?A) 54%B) 37%C) 85%D) 46%E) None of the above Answer: A Rationale: Nonowner financing for Mattell’s assets is provided from liabilities (the shareholders are the owners). Assets = Liabilities + Equity. Assets = $3,061 + $2,611 = $5,672. $3,061 / $5,672 = 54%.
Which of the following statements are correct (select all that apply):A) A balance sheet reports on investing and financing activities.B) An income statement reports on financing activities.C) The statement of equity reports on changes in the accounts that make up equity.D) The statement of cash flows reports on cash flows from operating, investing, and financing activities over a period of time.E) A balance sheet reports on a company’s assets and liabilities over a period of time. A, C, D
Which of the following groups would likely not be interested in the financial statements of a large public company such as Berkshire Hathaway?A) ShareholdersB) EmployeesC) CompetitorsD) Taxing agenciesE) None of the above Answer: ERationale: All of these parties would use the financial statements, albeit in different ways and for different purposes.
The Goodyear Tire & Rubber Company’s December 31, 2011, financial statements reported the following (in millions).Cash December 31, 2011 $ 2,772Cash from operating activities 773Cash from investing activities (902)Cash from financing activities 896What did Goodyear report for Cash on its December 31, 2010 balance sheet?A) $2,772 millionB) $3,539 millionC) $767 millionD) $2,005 millionE) None of the above Answer: DRationale: Cash, beginning of year + Cash from operating activities + Cash from investing activities + Cash from financing activities = Cash at end of yearCash, beginning of year + $773 – $902 + $896 = $2,772. Cash, beginning of year = $2,005
True or False? A statement of cash flows reports on cash flows for operating, investing and financing activities at a point in time? Answer: FalseRationale: A statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.
True or False? Shareholders demand financial information primarily to assess profitability and risk whereas bankers demand information primarily to assess cash flows to repay loan interest and principal. Answer: TrueRationale: While both shareholders and bankers are interested in all the information companies provide, shareholders care about more about a company’s profitability and bankers care more about solvency and creditworthiness.
For each of the following financial statement items, indicate the correct balance sheet classification, from the list below. You may use each balance sheet classification item only once.Interest payableTreasury stockInsurance expenseGoodwillNote payable, due in 2015Prepaid insurance expenseBalance sheet classification a. Current assetb. Long term assetc. Current liabilityd. Long term liabilitye. Equityf. None of the above Answer: Financial statement item Balance sheet classificationInterest payable c. Current liabilityTreasury stock e. EquityInsurance expense f. None of the aboveGoodwill b. Long term assetNote payable, due in 2015 d. Long term liabilityPrepaid insurance expense wa. Current asset
Assets are recorded in the balance sheet in order of:A) Market ValueB) Historic ValueC) LiquidityD) MaturityE) None of the above C) Liquidity
Liquidity refers to:A) The life cycle of the companyB) The amount of receivables the company has in the balance sheetC) The amount of financial leverageD) None of the above Answer: DRationale: Liquidity refers to cash, the amount on hand, the amount generated from operating activities, and the amount that can be raised on relatively short notice.
The 2011 balance sheet of The Washington Post Company shows average shareholders’ equity of $2,726,277 thousand, net operating profit after tax of $176,109 thousand, net income of $117,157 thousand, and average net operating assets of $2,414,864 thousand. The company’s return on net operating assets (RNOA) for the year is:A) 8.6%B) 4.3%C) 7.3%D) 4.8%E) There is not enough information to calculate the ratio. Answer: CRationale: RNOA = NOPAT / average NOA = $176,109 / $2,414,864 = 7.3%
The 2011 financial statements of The Washington Post Company reveal average common shareholders’ equity of $2,708,130 thousand, net operating profit after tax of $176,109 thousand, net income attributable to The Washington Post Company of $116,233 thousand, and average net operating assets of $ 2,414,864 thousand. The company’s return on equity (ROE) for the year is:A) 8.6%B) 4.8%C) 9.6%D) 4.3%E) There is not enough information to calculate the ratio. Answer: DRationale: ROE = Net income/Average shareholders’ equity = $116,233 / $2,708,130 = 4.3%
True or False? Solvency ratios measure a company’s ability to meet its debt obligations? Answer: TrueRationale: A solvent company is one that can meet its debt obligations including principal and interest payments as they come due.
True or False? All else equal, when investors consider a firm’s return on equity (ROE) they consider less risky a firm that earns proportionately more of that return from operating activities as opposed to non-operating activities? Answer: TrueRationale: Financial leverage will increase nonoperating return and ROE; however this adds risk to the investment. For equal returns, investors typically prefer less risk
True or False? Ratios provide one way to compare companies in the same industry regardless of their size? Answer: TrueRationale: Ratios mitigate problems arising from different sizes of companies.
True or False? Net operating asset turnover (NOAT) measures a company’s profitability? Answer: FalseRationale Net operating asset turnover is a productivity or efficiency concept.
Accrual Accounting Revenues are recorded when earned, and expenses are recorded when they are incurred.

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