CFA 一级 PROBLEMS()unit 21-27)
1. Providing information about the performance and financial position of companies so that users can make economic decisions best describes the role of:
A. auditing.
B. financial reporting.
C. financial statement analysis.
2. A company’s current financial position would best be evaluated using the:
A. balance sheet.
B. income statement.
C. statement of cash flows.
3. A company’s profitability for a period would best be evaluated using the:
A. balance sheet.
B. income statement.
C. statement of cash flows.
4.Accounting policies, methods, and estimates used in preparing financial statements are most likely found in the:
A. auditor’s report.
B. management commentary.
C. notes to the financial statements.
5. Information about management and director compensation would least likely be found in the:
A. auditor’s report.
B. proxy statement.
C. notes to the financial statements.
6. Information about a company’s objectives, strategies, and significant risks would most likely be found in the:
A. audit or’s report.
B. management commentary.
C. notes to the financial statements.
7. What type of audit opinion is preferred when analyzing financial statements?
A. Qualified.
B. Adverse.
C. Unqualified.
8. Ratios are an input into which step in the financial statement analysis framework?
A. Process data.
B. Collect input data.
C. Analyze/interpret the processed data.
1. Which of the following items would most likely be classified as an operating activity?
A. Issuance of debt.
B. Acquisition of a competitor.
C. Sale of automobiles by an automobile dealer.
2. Which of the following items would most likely be classified as a financing activity?
A. Issuance of debt.
B. Payment of income taxes.
C. Investments in the stock of a supplier.
3. Which of the following elements represents an economic resource?
A. Asset.
B. Liability.
C. Owners’ equity.
4. Which of the following elements represents a residual claim?
A. Asset.
B. Liability.
C. Owners’ equity.
5. An analyst has projected that a company will hav e assets of €2,000 at year-end and liabilities of
€1,200. The analyst’s projection of total owners’ equity should be closest to:
A. €800.
B. €2,000.
C. €3,200.
6. An analyst has collected the following information regarding a company in advance of its yearend earnings announcement (in millions):
Estimated net income $ 200
Beginning retained earnings $ 1,400
Estimated distributions to owners $ 100
The analyst’s estimate of ending retained earnings (in millions) should be closest to:
A. $1,300.
B. $1,500.
C. $1,700.
7. An analyst has compiled the following information regarding Rubsam, Inc.Liabilities at year-end € 1,000
Contributed capital at year-end € 500
Beginning retained earnings € 600
Revenue during the year € 5,000
Expenses during the year € 4,300
There have been no distributions to owners. The analyst’s most likely estimate of total assets atyear-end should be closest to:
A. €2,100.
B. €2,300.
C. €2,800.
8. A group of individuals formed a new company with an investment of $500,000. The most likely
effect of this transaction on the company’s accounting equation at the time of the formation is an
increase in cash and:
A. an increase in revenue.
B. an increase in liabilities.
C. an increase in contributed capital.
9. HVG, LLC paid $12,000 of cash to a real estate company upon signing a lease on 31 December2005. The payment represents a $4,000 security deposit and $4,000 of rent for each of January2006 and February 2006. Assuming that the correct accounting is to reflect both January andFebruary rent as prepaid, the most likely effect on HVG’s accou nting equation in December 2005is:
A. no net change in assets.
B. a decrease in assets of $8,000.
C. a decrease in assets of $12,000.
10. TRR Enterprises sold products to customers on 30 June 2006 for a total price of €10,000. The terms of the sale are that payment is due in 30 days. The cost of the products was €8,000. Themost likely net change in TRR’s total assets on 30 June 2006 related to this transaction is:
A. €0.
B. €2,000.
C. €10,000.
11. On 30 April 2006, Pinto Products received a cash payment of $30,000 as a deposit on productionof a custom machine to be delivered in August 2006. This transaction would most likely result inwhich of the following on 30 April 2006?
A. No effect on liabilities.
B. A decrease in assets of $30,000.
C. An increase in liabilities of $30,000.
12. Squires & Johnson, Ltd., recorded €250,000 of depreciatio n expense in December 2005. The most likely effect on the company’s accounting equation is:
A. no effect on assets.
B. a decreas e in assets of €250,000.
C. an increase in liabilities of €250,000.
13. An analyst who is interested in assessing a company’s financial posi tion is most likely to focus onwhich financial statement?
A. Balance sheet.
B. Income statement.
C. Statement of cash flows.
14. The statement of cash flows presents the flows into which three groups of business activities?
A. Operating, Nonoperating, and Financing.
B. Operating, Investing, and Financing.
C. Operating, Nonoperating, and Investing.
15. Which of the following statements about cash received prior to the recognition of revenue in thefinancial statements is most accurate? The cash is recorded as:
A. deferred revenue, an asset.
B. accrued revenue, a liability.
C. deferred revenue, a liability.
16. When, at the end of an accounting period, a revenue has been recognized in the financialstatements but no billing has occurred and no cash has been received, the accrual is to:
A. unbilled (accrued) revenue, an asset.
B. deferred revenue, an asset.
C. unbilled (accrued) revenue, a liability.
17. When, at the end of an accounting period, cash has been paid with respect to an expense, thebusiness should then record:
A. an accrued expense, an asset.
B. a prepaid expense, an asset.
C. an accrued expense, a liability.
18. When, at the end of an accounting period, cash has not been paid with respect to an expense thathas been incurred, the business should then record:
A. an accrued expense, an asset.
B. a prepaid expense, an asset.
C. an accrued expense, a liability.
19. The collection of all business transactions sorted by account in an accounting system is referredto as:
A. a trial balance.
B. a general ledger.
C. a general journal.
20. If a company reported fictitious revenue, it could try to cover up its fraud by:
A. decreasing assets.
B. increasing liabilities.
C. creating a fictitious asset.
READING 23
1. Which of the following is most likely not an objective of financial
statements?
A. To provide information about the performance of an entity.
B. To provide information about the financial position of an entity.
C. To provide information about the users of an entity’s financial statements.
2. International financial reporting standards are currently developed by whichentity?
A. The IFRS Foundation.
B. The International Accounting Standards Board.
C. The International Organization of Securities Commissions.
3. US generally accepted accounting principles are currently developed bywhich entity?
A. The Securities and Exchange Commission.
B. The Financial Accounting Standards Board.
C. The Public Company Accounting Oversight Board.
4. Which of the following statements about desirable attributes of accountingstandards boards is most accurate? Accounting standards boards should:
A. concede to political pressures.
B. be guided by a well articulated framework.
C. be adequately funded by companies to which the standards apply.
5. A core objective of the International Organization of SecuritiesCommissions is to:
A. eliminate systematic risk.
B. protect users of financial statements.
C. ensure that markets are fair, efficient, and transparent.
6. According to the Conceptual Framework for Financial Reporting (2010),which of the following is not an enhancing qualitative characteristic ofinformation in financial statements?
A. Accuracy.
B. Timeliness.
C. Comparability.
7. Which of the following is not a constraint on the financial statementsaccording to the Conceptual Framework (2010)?
A. Understandability.
B. Benefit versus cost.
C. Balancing of qualitative characteristics.
8. The assumption that an entity will continue to operate for the foreseeablefuture is called:
A. accrual basis.
B. comparability.
C. going concern.
9. The assumption that the effects of transactions and other events arerecognized when they occur, not when the cash flows occur, is called:
A. relevance.
B. accrual basis.
C. going concern.
10. Neutrality of information in the financial statements most closelycontributes to which qualitative characteristic?
A. Relevance.
B. Understandability.
C. Faithful representation.
11. Valuing assets at the amount of cash or equivalents paid or the fair value ofthe consideration given to acquire them at the time of acquisition mostclosely describes which measurement of financial statement elements?
A. Current cost.
B. Historical cost.
C. Realizable value.
12. The valuation technique under which assets are recorded at the amount thatwould be received in an orderly disposal is:
A. current cost.
B. present value.
C. realizable value.
13. Which of the following is not a required financial statement according toIAS No. 1?
A. Statement of financial position.
B. Statement of changes in income.
C. Statement of comprehensive income.
14. Which of the following elements of financial statements is most closelyrelated to measurement of performance?
A. Assets.
B. Expenses.
C. Liabilities.
15. Which of the following elements of financial statements is most closelyrelated to measurement of financial position?
A. Equity.
B. Income.
C. Expenses.
16. Which of the following is not a characteristic of a coherent financialreporting framework?
A. Timeliness.
B. Consistency.
C. Transparency.
17. Which of the following is not a recognized approach to standard-setting?
A. A rules-based approach.
B. An asset/liability approach.
C. A principles-based approach.
18. Which of the following disclosures regarding new accounting standardsprovides
the most meaningful information to an analyst?
A. The impact of adoption is discussed.
B. The standard will have no material impact.
C. Management is still evaluating the impact.
READING 24
1. Expenses on the income statement may be grouped by:
A. nature, but not by function.
B. function, but not by nature.
C. either function or nature.
2. An example of an expense classification by function is:
A. tax expense.
B. interest expense.
C. cost of goods sold.
3. Denali Limited, a manufacturing company, had the following income statementinformation:
Revenue $4,000,000
Cost of goods sold $3,000,000
Other operating expenses $500,000
Interest expense $100,000
Tax expense $120,000
Denali’s gross profit is equal to
A. $280,000.
B. $500,000.
C. $1,000,000.
4. Under IFRS, income includes increases in economic benefits from:
A. increases in liabilities not related to owners’ contributions.
B. enhancements of assets not related to owners’ contributions.
C. increases in owners’ equity related to owners’ contributions.
5. Fairplay had the following information related to the sale of its products during2009, which was its first year of business:
Revenue $1,000,000
Returns of goods sold $100,000
Cash collected $800,000
Cost of goods sold $700,000
Under the accrual basis of accounting, how much net revenue would be reportedon Fairplay’s 2009 income statement?
A. $200,000.
B. $900,000.
C. $1,000,000.
6. If the outcome of a long-term contract can be measured reliably, the preferred accounting method under both IFRS and US GAAP is:
A. the cost recovery method.
B. the completed contract method.
C. the percentage-of-completion method.
7. At the beginning of 2009, Florida Road Construction entered into a contract to build a road for the government. Construction will take four years. The following information as of 31 December 2009 is available for the contract:
Total revenue according to contract $10,000,000
Total expected cost $8,000,000
Cost incurred during 2009 $1,200,000
Assume that the company estimates percentage complete based on costs incurredas a percentage of total estimated costs. Under the completed contract method, how much revenue will be reported in 2009?
A. None.
B. $300,000.
C. $1,500,000.
8. During 2009, Argo Company sold 10 acres of prime commercial zoned land to abuilder for $5,000,000. The builder gave Argo a $1,000,000 down payment andwill pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchasedthe land in 2002 for $2,000,000. Using the installment method, how much profitwill Argo report for 2009?
A. $600,000.
B. $1,000,000.
C. $3,000,000.
9. Using the same information as in Question 8, how much profit will Argo reportfor 2009 using the cost recovery method?
A. None.
B. $600,000.
C. $1,000,000.
10. Under IFRS, revenue from barter transactions should be measured based on thefair value of revenue from:
A. similar barter transactions with unrelated parties.
B. similar non-barter transactions with related parties.
C. similar non-barter transactions with unrelated parties.
11. Apex Consignment sells items over the internet for individuals on a consignmentbasis. Apex receives the items from the owner, lists them for sale on the internet,and receives a 25 percent commission for any items sold. Apex collects the fullamount from the buyer and pays the net amount after commission to the owner. Unsold items are returned to the owner after 90 days. During 2009, Apex had thefollowing information:
Total sales price of items sold during 2009 on consignment was€2,000,000.
Total commissions retained by Apex during 2009 for these items was€500,000.
How much revenue should Apex report on its 2009 income statement?
A. €500,000.
B. €2,000,000.
C. €1,500,000.
12. During 2009, Accent Toys Plc., which began business in October of that year,purchased 10,000 units of a toy at a cost of ?10 pe r unit in October. The toy soldwell in October. In anticipation of heavy December sales, Accent purchased5,000 additional units in November at a cos t of ?11 per unit. During 2009,Accent sold 12,000 units at a price of ?15 per unit. Under the first in, first out(FIFO) method,
what is Accent’s cost of goods sold for 2009?
A. ?120,000.
B. ?122,000.
C. ?124,000.
13. Using the same information as in Question 12, what would Accent’s cost of goods sold be under the weighted average cost method?
A. ?120,000.
B. ?122,000.
C. ?124,000.
14. Which inventory method is least likely to be used under IFRS?
A. First in, first out (FIFO).
B. Last in, first out (LIFO).
C. Weighted average.
15. At the beginning of 2009, Glass Manufacturing purchased a new machine for itsassembly line at a cost of $600,000. The machine has an estimated useful life of10 years and estimated residual value of $50,000. Under the straight-line method,how much depreciation would Glass take in 2010 for financial reportingpurposes?
A. $55,000.
B. $60,000.
C. $65,000.
16. Using the same information as in Question 15, how much depreciation wouldGlass take in 2009 for financial reporting purposes under the double-decliningbalance method?
A. $60,000.
B. $110,000.
C. $120,000.
17. Which combination of depreciation methods and useful lives is mostconservative in the year a depreciable asset is acquired?
A. Straight-line depreciation with a short useful life.
B. Declining balance depreciation with a long useful life.
C. Declining balance depreciation with a short useful life.
18. Under IFRS, a loss from the destruction of property in a fire would most likelybe classified as:
A. continuing operations.
B. discontinued operations.
C. other comprehensive income.
19. For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009,there were 1,000,000 shares outstanding. On 1 July 2009, the company issued100,000 new shares for $20 per share. The company paid $200,000 in dividends to common shareholders. What is Flamingo’s basic earnings per share for 2009?
A. $0.80.
B. $0.91.
C. $0.95.
20. Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of2009. During 2009, CSI also had 10,000 options outstanding with exercise pricesof $10 each. The average stock price of CSI during 2009 was $15. For purposesof computing diluted earnings per share, how many shares would be used in the denominator?
A. 1,003,333.
B. 1,006,667.
C. 1,010,000.
READING 25
1. Resources controlled by a company as a result of past events are:
A. equity.
B. assets
C. liabilities.
2. Equity equals:
A. Assets – Liabilities.
B. Liabilities – Assets.
C. Assets + Liabilities.
3. Distinguishing between current and non-current items on the balance sheet andpresenting a subtotalfor current assets and liabilities is referred to as:
A. a classified balance sheet.
B. an unclassified balance sheet.
C. a liquidity-based balance sheet.
4. All of the following are current assets except:
A. cash.
B. goodwill.
C. inventories.
5. Debt due within one year is considered:
A. current.
B. preferred.
C. convertible.
6. Money received from customers for products to be delivered in the future is recorded as:
A. revenue and an asset.
B. an asset and a liability.
C. revenue and a liability.
7. The carrying value of inventories reflects:
A. their historical cost.
B. their current value.
C. the lower of historical cost or net realizable value.
8. When a company pays its rent in advance, its balance sheet will reflect a reductionin:
A. assets and liabilities.
B. assets and shareholders’ equity.
C. one category of assets and an increase in another.
9. Accrued expenses (accrued liabilities) are:
A. expenses that have been paid.
B. created when another liability is reduced.
C. expenses that have been reported on the income statement but not yet paid.
10. The initial measurement of goodwill is most likely affected by:
A. an acquisiti on’s purchase price.
B. the acquired company’s book value.
C. the fair value of the acquirer’s assets and liabilities.
11. Defining total asset turnover as revenue divided by average total assets, all else equal, impairmentwrite-downs of long-lived assets owned by a company will most likely result in an increase for thatcompany in:
A. the debt-to-equity ratio but not the total asset turnover.
B. the total asset turnover but not the debt-to-equity ratio.
C. both the debt-to-equity ratio and the total asset turnover.
12. For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders’ equity?
A. They are not recognized.
B. They flow through income into retained earnings.
C. They are a component of accumulated other comprehensive income.
13. For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders’ equity?
A. They are not recognized.
B. They flow through retained earnings.
C. They are a component of accumulated other comprehensive income.
14. For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders’ equity?
A. They are not recognized.
B. They flow through retained earnings.
C. They are a component of accumulated other comprehensive income.
15. The non-controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet:
A. as a long-term liability.
B. separately, but as a part of shareholders’ equity
C. as a mezzanine it em between liabilities and shareholders’ equity.
16. The item “retained earnings” is a component of:
A. assets.
B. liabilities.
C. shareholders’ equity.
17. When a company buys shares of its own stock to be held in treasury, it records a reduction in:
A. both assets and liabilities.
B. both assets and shareholders’ equity.
C. assets and an increase in shareholders’ equity.
18. Which of the following would an analyst most likely be able to determine from a common-size analysis of a company’s balance sheet ove r several periods?
A. An increase or decrease in sales.
B. An increase or decrease in financial leverage.
C. A more efficient or less efficient use of assets.
19. An investor concerned whether a company can meet its near-term obligations is most likely tocalculate the:
A. current ratio.
B. return on total capital.
C. financial leverage ratio.
20. The most stringent test of a company’s liquidity is its:
A. cash ratio.
B. quick ratio.
C. current ratio.
21. An investor worried about a company’s long-term solvency would most likely examine its:
A. current ratio.
B. return on equity.
C. debt-to-equity ratio.
22. Using the information presented in Exhibit 4, the quick ratio for SAP Group at 31 December 2009 is closest to:
A. 1.01.
B. 1.44.
C. 1.54.
23. Using the information presented in Exhibit 12, the financial leverage ratio for SAP Group at 31ecember 2009 is closest to:
A. 0.08.
B. 0.58.
C. 1.58.
READING 26
1. The three major classifications of activities in a cash flow statement are:
A. inflows, outflows, and net flows.
B. operating, investing, and financing.
C. revenues, expenses, and net income.
2. The sale of a building for cash would be classified as what type of activity on theash flow statement?
A. Operating.
B. Investing.
C. Financing.
3. Which of the following is an example of a financing activity on the cash flow statement under US GAAP?
A. Payment of interest.
B. Receipt of dividends.
C. Payment of dividends.
4. A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be:
A. reported as a $1 million investing cash inflow and outflow.
B. reported as a $1 million financing cash outflow and inflow.
C. reported as supplementary information to the cash flow statement.
5. Interest paid is classified as an operating cash flow under:
A. US GAAP but may be classified as either operating or investing cash
flows under IFRS.
B. IFRS but may be classified as either operating or investing cash flows under US GAAP.
C. US GAAP but may be classified as either operating or financing cash
flows under IFRS.
6. Cash flows from taxes on income must be separately disclosed under:
A. IFRS only.
B. US GAAP only.
C. both IFRS and US GAAP.
7. Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP?
A. Operating.
B. Investing.
C. Financing.
8. Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method?
A. Net income.
B. Cash paid to suppliers.
C. Cash received from customers.
9. Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers?
A. $90 million.
B. $100 million.
C. $110 million.
10. Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including
an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. The cash
paid by the company to its suppliers is most likely closest to:
A. $73 million.
B. $77 million.
C. $83 million.
11. Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million,
and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to:
A. $67 million.
B. $79 million.
C. $83 million.
12. White Flag, a women’s clothing manufacturer, reported salaries expense of $20 million. The beginning balance of salaries payable was $3 million, and
the ending balance of salaries payable was $1 million. How much cash did
the company pay in salaries?
A. $18 million.
B. $21 million.
C. $22 million.
13. An analyst gathered the following information from a company’s 2010 financial statements (in $ millions):
Year ended 31 December 2009 2010
Net sales 245.8 254.6
Cost of goods sold 168.3 175.9
Accounts receivable 73.2 68.3
Inventory 39.0 47.8
Accounts payable 20.3 22.9
Based only on the information above, the company’s 2010 statement of cash flows in the direct format would include amounts (in $ millions) for cash received from customers and cash paid to suppliers, respectively, that are closest to:
cash received from customers cash paid to suppliers
A 249.7 169.7
B 259.5 174.5
C 259.5 182.1
14. Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased
by $3 million, and taxes payable decreased by $4 million over the period.
How much cash did the company pay for interest and taxes?
A. $22 million for interest and $10 million for taxes.
B. $16 million for interest and $2 million for taxes.
C. $16 million for interest and $10 million for taxes.
15. An analyst gathered the following information from a company’s 2010 financial statements (in $ millions):
Balances as of Year Ended 31 December 2009 2010
Retained earnings 120 145
Accounts receivable 38 43
Inventory 45 48
Accounts payable 36 29
In 2010, the company declared and paid cash dividends of $10 million and recorded depreciation expense in the amount of $25 million. The company considers dividends paid a financing activity. The company’s 2010 cash flow from operations (in $ millions) was closest to
A. 25.
B. 45.
C. 75.
16. Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of $2 million in 2010. In addition, the company’s income statement shows depreciation expense of $8 million and the cash
flow statement shows capital expenditure of $10 million, all of which was
for the purchase of new equipment. Using the following information from
the comparative balance sheets, how much cash did the company receive from the equipment sale?
Balance Sheet Item 12/31/2009 12/31/2010 Change
Equipment $100million
$105million
$5million
Accumulated depreciation—
equipment
$40million
$46million
$6million
A. $1 million.
B. $2 million.
C. $3 million.
17. JaderongPlinkett Stores reported net income of $25 million. The company has no outstanding debt. Using the following information from the
comparative balance sheets (in millions), what should the company report in the financing section of the statement of cash flows in 2010?
Balance Sheet Item 12/31/2009 12/31/2010 Change
Common stock $100 $102 $2
Additional paid-in capital common
stock
$100 $140 $40
Retained earnings $100 $115 $15
Total stockholders’ equity $300 $357 $57
A. Issuance of common stock of $42 million; dividends paid of $10 million.
B. Issuance of common stock of $38 million; dividends paid of $10 million.
C. Issuance of common stock of $42 million; dividends paid of $40 million.
18. Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow?
Year Ended
Income Statement Item 12/31/2010
Net income $20 million
Depreciation $2 million
Balance Sheet Item 12/31/2009 12/31/2010 Change
Accounts receivable $25 million $22 million ($3 million)
Inventory $10 million $14 million $4 million
Accounts payable $8 million $13 million $5 million
A. Add $2 million.
B. Add $6 million.
C. Subtract $6 million.
19. The first step in cash flow statement analysis should be to:
A. evaluate consistency of cash flows.
B. determine operating cash flow drivers.
C. identify the major sources and uses of cash.
20. Which of the following would be valid conclusions from an analysis of the cash flow statement for Telefónica Group presented in Exhibit 3?
A. The primary use of cash is financing activities.
B. The primary source of cash is operating activities.
C. Telefónica classifies interest received as an operating activity.
21. Which is an appropriate method of preparing a common-size cash flow statement?
A. Show each item of revenue and expense as a percentage of net revenue.
B. Show each line item on the cash flow statement as a percentage of net revenue.
C. Show each line item on the cash flow statement as a percentage of
total cash outflows.
22. Which of the following is an appropriate method of computing free cash flow to the firm?
A. Add operating cash flows to capital expenditures and deduct after-tax interest payments.
B. Add operating cash flows to after-tax interest payments and deduct capital expenditures.
C. Deduct both after-tax interest payments and capital expenditures from operating cash flows.
23. An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure, and what does it indicate?
A. This ratio is an inter est coverage ratio, measuring a company’s ability
to meet its interest obligations and indicating a company’s solvency.
B. This ratio is an effective tax ratio, measuring the amount of a company’s operating cash flow used for taxes and indicating a company’s efficiency in tax management.
C. This ratio is an operating profitability ratio, measuring the operating cash flow generated accounting for taxes and interest and indicating a company’s liquidity.
READING 27
1. Comparison of a company’s financial results to other peer companies for the same time period is called:
A. technical analysis.
B. time-series analysis.
C. cross-sectional analysis.
2. In order to assess a company’s ability to fulfill its long-term obligations, an analyst would most likely
examine:
A. activity ratios.
B. liquidity ratios.
C. solvency ratios.
3. Which ratio would a company most likely use to measure its ability to meet
short-term obligations?
A. Current ratio.
B. Payables turnover.
C. Gross profit margin.
4. Which of the following ratios would be most useful in determining a company’s ability to cover its lease
and interest payments?
A. ROA.
B. Total asset turnover.
C. Fixed charge coverage.
5. An analyst is interested in assessing both the efficiency and liquidity of Spherion PLC. The analyst has
collected the following data for Spherion:
FY3 FY2 FY1
Days of inventory on hand 32 34 40
Days sales outstanding 28 25 23
Number of days of payables 40 35 35
Based on this data, what is the analyst least likely to conclude?
A. Inventory management has contributed to improved liquidity.
B. Management of payables has contributed to improved liquidity.
C. Management of receivables has contributed to improved liquidity.
6. An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the following
data (in millions of euro):
FY5 (€) FY4 (€) FY3 (€)
Total debt 2,000 1,900 1,750
Total equity 4,000 4,500 5,000
Which of the following would be the analyst’s most likely conclusion