3. Financial Statement Analysis Questions Bank 2023

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Question #1 of 25 Question ID: 1457192

An analyst who wants to examine a firm's financing transactions during the most recentperiod is most likely to evaluate the firm's statement of:

statement of financial position (balance sheet) presents the firm's assets, liabilities, andequity at a point in time The statement of comprehensive income (income statement)does not directly reflect a firm's financing transactions Cash raised is not included in afirm's revenues and dividends paid and debt principal repaid are not included in its

expenses

(Module 16.1, LOS 16.b)

The standard auditor's report is most likely required to:

A) provide an "unquali ed" opinion if material uncertainties exist

B)provide reasonable assurance that the nancial statements contain no materialerrors

C) provide reasonable assurance that management is reliable

Explanation

The standard auditor's report contains three parts:

1 The financial statements are prepared by management and are their responsibilityand the auditor has performed an independent review

2 The audit was conducted using generally accepted auditing standards, which

provides reasonable assurance that there are no material errors in the financialstatements

3 The auditor is satisfied the statements were prepared in accordance with acceptedaccounting principles, and the principles chosen and estimates are reasonable.Under U.S GAAP, the auditor is required to state an opinion on the company's internalcontrols The auditor may add this opinion as a fourth element of the auditor's report orprovide it separately

(Module 16.2, LOS 16.d)

Which financial statement reports information about a company's financial position at asingle point in time?

(Module 16.1, LOS 16.b)

According to IFRS guidance for management's commentary, addressing the company's keyrelationships is:

A) neither recommended nor required

B) required

C) recommended

Explanation

IFRS recommends that management commentary address the company's key

relationships, resources, and risks, as well as the nature of the business, management'sobjectives, the company's past performance, and the performance measures used

Securities regulators may impose requirements for publicly traded firms to address

certain topics in management's commentary, but accounting standards do not

(Module 16.2, LOS 16.c)

The role of financial statement analysis is most accurately described as:

A) a common requirement for companies that are listed on public exchanges

B)the use of information from a company’s nancial statements along with otherinformation to make economic decisions regarding that company

C)the reports and presentations a company uses to show its nancial

performance to investors, creditors, and other interested parties

Explanation

Financial statement analysis refers to the use of information from a company's financialstatements along with other information to make economic decisions regarding thatcompany Financial reporting refers to the reports and presentations that a company uses

to show its financial performance to investors, creditors, and other interested parties.Financial reporting is a requirement for companies that are listed on public exchanges.(Module 16.1, LOS 16.a)

Which of the following statements concerning the notes to the audited financial statements

of a company is least accurate? Financial statement notes:

A)include management's assessment of the company's operating performance

and nancial results

B) are audited

C) contain information about contingent losses that may occur

Explanation

Management's perspective on the company's results is provided in the Management'sDiscussion and Analysis supplement to the financial statements Financial statement notes(footnotes) provide information about matters such as the company's accounting methodsand assumptions, contingencies, and acquisitions and disposals Footnotes to the financialstatements are audited.

(Module 16.2, LOS 16.c)

A company's operating revenues for a reporting period are most likely to be shown on its:

in a different period than cash is collected The balance sheet displays a company's

financial position at a fixed point in time

(Module 16.1, LOS 16.b)

According to the IASB, which of the following least accurately describes financial reporting?Financial reporting:

A) provides information about changes in nancial position of an entity

B) is useful to a wide range of users

C)uses the information in a company’s nancial statements to make economic

decisions

Explanation

The role of financial reporting is described by the International Accounting StandardsBoard (IASB) in its "Framework for the Preparation and Presentation of Financial

Statements":

The objective of financial statements is to provide information about the financial position,performance and changes in financial position of an entity that is useful to a wide range ofusers in making economic decisions

Using the information in a company's financial statements to make economic decisions isfinancial analysis, not financial reporting

(Module 16.1, LOS 16.a)

Which of the following is least likely to be considered a role of financial statement analysis?

A) Assessing the management skill of the company’s executives

B) Determining whether to invest in the company's securities

C) To make economic decisions

(Module 16.1, LOS 16.a)

Which of the following statements about financial statement analysis and reporting is least

C)Deciding whether to recommend a company’s securities to investors is a role ofnancial statement analysis.

Explanation

Financial reporting refers to the way companies show their financial performance toinvestors, creditors, and other interested parties by preparing and presenting financialstatements, including information about changes in a company's financial position Therole of financial statement analysis is to use the information in a company's financialstatements, along with other relevant information, to make economic decisions, such aswhether to invest in the company's securities or recommend them to other investors.Analysts use financial statement data to evaluate a company's past performance andcurrent financial position in order to form opinions about the company's ability to earnprofits and generate cash flow in the future

(Module 16.1, LOS 16.a)

In addition to the audited financial statements included in a firm's annual report, which ofthe following sources of information is most likely to contain audited data?

A) Footnotes to the annual nancial statements

(Module 16.2, LOS 16.e)

Which of the following is least likely to be available on EDGAR (Electronic Data Gathering,Analysis, and Retrieval System)?

A) Corporate press releases

B) Form 10Q

C) SEC lings

Explanation

Securities and Exchange Commission (SEC) filings are available from EDGAR (ElectronicData Gathering, Analysis, and Retrieval System, www.sec.gov) Companies' annual andquarterly financial statements are also filed with the SEC (Form 10-K and Form 10-Q,respectively).

(Module 16.2, LOS 16.e)

For publicly traded firms in the United States, the Management Discussion and Analysis(MD&A) portion of the financial disclosure is least likely required to discuss:

A) capital resources and liquidity

Which of the following statements represents information at a specific point in time?

A) The balance sheet

B) The income statement and the balance sheet

C) The income statement

Explanation

The balance sheet represents information at a specific point in time The income

statement represents information over a period of time

(Module 16.1, LOS 16.b)

Question #15 of 25 Question ID: 1457200

A firm's internal controls are most accurately described as:

A) directly a ecting the rm’s nancial reporting quality

B) outside the scope of an audit report under IFRS and U.S GAAP

C) a responsibility of the rm’s board of directors

Explanation

Weak internal controls provide an opportunity for low-quality or even fraudulent financialreporting A firm's management, not its board of directors, is responsible for ensuring theeffectiveness of a firm's internal controls Under U.S GAAP, auditors are required to state

an opinion on a firm's internal controls

(Module 16.2, LOS 16.d)

The step in the financial statement analysis framework that includes making any appropriateadjustments to the financial statements and calculating ratios is best described as:

A) analyzing and interpreting the data

B) gathering the data

C) processing the data

Explanation

The financial statement analysis framework consists of six steps:

1 State the objective and context Determine what questions the analysis is meant toanswer, the form in which it needs to be presented, and what resources and howmuch time are available to perform the analysis

2 Gather data Acquire the company's financial statements and other relevant data onits industry and the economy Ask questions of the company's management,

suppliers, and customers, and visit company sites

3 Process the data Make any appropriate adjustments to the financial statements.Calculate ratios Prepare exhibits such as graphs and common-size balance sheets

4 Analyze and interpret the data Use the data to answer the questions stated in thefirst step Decide what conclusions or recommendations the information supports

5 Report the conclusions or recommendations Prepare a report and communicate it

to its intended audience Be sure the report and its dissemination comply with theCode and Standards that relate to investment analysis and recommendations

6 Update the analysis Repeat these steps periodically and change the conclusions orrecommendations when necessary

(Module 16.2, LOS 16.f)

Which of the following statements regarding footnotes to the financial statements is least

accurate? Financial statement footnotes:

A) may contain information regarding contingent losses

B) provide information about assumptions and estimates used by management

C) typically include a discussion of the rm’s past performance and future outlook

Explanation

Discussion of a firm's past performance and future outlook is most likely to be found inmanagement's commentary

(Module 16.2, LOS 16.c)

Which of the following would NOT require an explanatory paragraph added to the auditors'report?

A) Doubt regarding the "going concern" assumption.

B) Uncertainty due to litigation

C) Statements that the nancial information was prepared according to GAAP

Explanation

The statements that the financial information was prepared according to GAAP should beincluded in the regular part of the auditors' report and not as an explanatory paragraph.The other information would be contained in explanatory paragraphs added to the

auditors' report

(Module 16.2, LOS 16.d)

Which of the following best describes financial reporting and financial statement analysis?

Financial reports assess a company’s past performance in order to draw

conclusions about the company’s ability to generate cash and pro ts in the

statements, along with other relevant information, to assess a company's past

performance in order to draw conclusions about the company's ability to generate cashand profits in the future

(Module 16.1, LOS 16.a)

In the financial statement analysis framework, using the data to address the objectives ofthe analysis and deciding what conclusions or recommendations the information supports is

best described as:

A) analyzing and interpreting the data

B) processing the data

C) reporting the conclusions

Explanation

The financial statement analysis framework consists of six steps:

1 State the objective and context Determine what questions the analysis is meant toanswer, the form in which it needs to be presented, and what resources and howmuch time are available to perform the analysis

2 Gather data Acquire the company's financial statements and other relevant data onits industry and the economy Ask questions of the company's management,

suppliers, and customers, and visit company sites

3 Process the data Make any appropriate adjustments to the financial statements.Calculate ratios Prepare exhibits such as graphs and common-size balance sheets

4 Analyze and interpret the data Use the data to answer the questions stated in thefirst step Decide what conclusions or recommendations the information supports

5 Report the conclusions or recommendations Prepare a report and communicate it

to its intended audience Be sure the report and its dissemination comply with theCode and Standards that relate to investment analysis and recommendations

6 Update the analysis Repeat these steps periodically and change the conclusions orrecommendations when necessary

(Module 16.2, LOS 16.f)

The step in the financial statement analysis framework of "processing the data" is least likely

to include which activity?

A) Acquiring the company’s nancial statements

B) Preparing exhibits such as graphs

C) Making appropriate adjustments to the nancial statements

Explanation

The financial statement analysis framework consists of six steps Step 2: "Gather data"includes acquiring the company's financial statements and other relevant data on itsindustry and the economy Step 3 "Process the data" includes activities such as makingany appropriate adjustments to the financial statements and preparing exhibits such asgraphs and common-size balance sheets.

(Module 16.2, LOS 16.f)

Which of the following is the best description of the financial statement analysis framework?

A)Gather data, analyze and interpret the data, process the conclusions, assess thecontext, report the recommendations, update the analysis

B)

State the objective and context, gather data, process the data, analyze and

interpret the data, report the conclusions or recommendations, update the

analysis

C)Gather data, analyze and interpret the data, determine the context, report theconclusions, update the analysis

Explanation

The financial statement analysis framework consists of six steps:

1 State the objective and context

2 Gather data

3 Process the data

4 Analyze and interpret the data

5 Report the conclusions or recommendations

6 Update the analysis

(Module 16.2, LOS 16.f)

Which of the following is an analyst least likely to rely on as objective information to include

in a company analysis?

A) Corporate press releases

B)Government agency statistical data on the economy and the company’s

industry

C) Proxy statements

Corporate reports and press releases are written by management and are often viewed aspublic relations or sales materials An analyst should review information on the economyand the company's industry and compare the company to its competitors This

information can be acquired from sources such as trade journals, statistical reportingservices, and government agencies Securities and Exchange Commission (SEC) filingsinclude Form 8-K, which a company must file to report events such as acquisitions anddisposals of major assets or changes in its management or corporate governance andproxy statements, which are a good source of information about the election of (andqualifications of) board members, compensation, management qualifications, and theissuance of stock options

(Module 16.2, LOS 16.e)

Which of the following is an independent auditor least likely to do with respect to a

company's financial statements?

A) Con rm assets and liabilities contained in them

B) Prepare and accept responsibility for them

C) Provide an opinion concerning their fairness and reliability

Explanation

Auditors make an independent review of financial statements, which are prepared bycompany management and are management's responsibility It is the responsibility ofauditors to confirm the assets, liabilities, and other items included in the statements andthen issue an opinion concerning their fairness and reliability

(Module 16.2, LOS 16.d)

Which of the following statements about proxy statements is least accurate? Proxy

statements are:

A) not led with the SEC

B)a good source of information about the quali cations of board members andmanagement.

C) available on the EDGAR web site

Explanation

Proxy statements are issued to shareholders when there are matters that require ashareholder vote These statements, which are also filed with the SEC and available fromEDGAR, are a good source of information about the election of (and qualifications of)board members, compensation, management qualifications, and the issuance of stockoptions

(Module 16.2, LOS 16.e)

Question #1 of 12 Question ID: 1457214Which of the following is least likely a qualitative characteristic accounting information mustpossess in order to provide useful information to an analyst, according to the IASB

The objective of financial reporting is most accurately described as providing informationabout a firm that is:

A) complete, neutral, and free from error

B) compliant with accepted accounting principles

C) useful to decision makers

Explanation

According to the Conceptual Framework for Financial Reporting, the objective of financialreporting is to provide information about the firm to current and potential investors andcreditors that is useful for making their decisions about investing in or lending to the firm

(Module 17.1, LOS 17.a)

Question #3 of 12 Question ID: 1457217Required financial statements, according to International Accounting Standard (IAS) No 1,include a(n):

A) balance sheet and explanatory notes

B) cash ow statement and auditor’s report

C) income statement and working capital summary

Explanation

Financial statements that are required by IAS No 1 include a balance sheet, a statement ofcomprehensive income, a cash flow statement, a statement of changes in owners' equity,and explanatory notes that include a summary of the company's accounting policies IAS

No 1 does not require an auditor's report or a working capital summary

(Module 17.2, LOS 17.d)

A firm engages in a new type of financial transaction that has a material effect on its

earnings An analyst should most likely be suspicious of the new transaction if:

A) management has not explained its business purpose

B) no accounting standard exists that applies to the transaction

C) the transaction is not governed by existing regulations

Explanation

New types of transactions may emerge that are not covered by existing accounting

standards or regulations Analysts should obtain information from a firm's managementabout the economic substance of such transactions to ensure that they serve a businesspurpose and have not been created primarily to manipulate the firm's financial

statements

(Module 17.2, LOS 17.e)

Which of the following is least likely one of the general requirements for financial statementsunder IFRS?

A) Statements should be prepared under a going concern assumption

B) Statements should be prepared at least quarterly

C)No o setting of income against expenses unless a standard permits or requiresit

Explanation

IFRS require reporting at least annually The other two choices are requirements included

in IAS No 1

(Module 17.2, LOS 17.d)

Two underlying assumptions of financial statements, according to the IASB conceptualframework, are:

A) going concern and accrual accounting

B) accrual accounting and historical cost

C) historical cost and going concern

Explanation

The two underlying assumptions of financial statements according to the conceptualframework are accrual accounting and the going concern assumption Historical cost isone of several measurement bases that may be used for financial reporting

(Module 17.2, LOS 17.c)

Which of the following is least likely a fundamental characteristic of financial statements thatmakes them useful, according to the IASB Conceptual Framework for Financial Reporting?

A) Reliability

B) Relevance

C) Faithful representation

The IASB Conceptual Framework names relevance and faithful representation as the twofundamental characteristics that make financial information useful (Module 17.2, LOS17.c)

According to the IFRS framework, timeliness is a characteristic that enhances:

A) only relevance

B) only faithful representation

C) both relevance and faithful representation

Explanation

In the IFRS framework, timeliness, comparability, verifiability, and understandability arecharacteristics that enhance the two fundamental qualitative characteristics, relevanceand faithful representation Information that is not timely will not be relevant or faithfullyrepresent the activities of a firm over the reporting period

(Module 17.2, LOS 17.c)

Which of the following is a company least likely required to present according to

International Accounting Standard (IAS) No 1?

A) Disclosures of material events

B) Statement of changes in owners’ equity

C) A summary of accounting policies

Explanation

International Accounting Standard (IAS) No 1 defines which financial statements arerequired and how they must be presented The required financial statements are:

Balance sheet

Statement of comprehensive income

Cash flow statement

Statement of changes in equity

Explanatory notes, including a summary of accounting policies

Disclosures of material events that affect the company are required by the Securities andExchange Commission (Form 8-K) for firms that are publicly traded in the United States.(Module 17.2, LOS 17.d)

Accounting standard setting bodies are best described as:

A)government agencies that exercise regulatory authority over nancial reportingstandards

B)organizations of securities commissions that establish international nancial

governments Most national authorities belong to the International Organization of

Securities Commissions (IOSCO)

(Module 17.1, LOS 17.b)

According to the IASB Conceptual Framework for Financial Reporting, one of the qualitativecharacteristics of financial statements is:

A) faithful representation

B) going concern

C) timeliness.

Explanation

In the IASB conceptual framework, the two qualitative characteristics of financial

statements are relevance and faithful representation Timeliness is a characteristic thatenhances relevance and faithful representation Going concern is an underlying

assumption of financial statements

(Module 17.2, LOS 17.c)

According to the IASB conceptual framework, characteristics that enhance relevance andfaithful representation include:

A) comparability, understandability, and thoroughness

B) assurance, timeliness, and understandability

C) timeliness, comparability, and veri ability

Explanation

The four characteristics that enhance relevance and faithful representation are

comparability, verifiability, timeliness, and understandability

(Module 17.2, LOS 17.c)

Question #1 of 155 Question ID: 1457361Royster Company presents the following income statement:

Selling and administrative expense $1,200

Selling and administrative expense 10%

(Module 18.5, LOS 18.i)

Antidilutive securities should be assumed to have been converted to common shares whencalculating:

A) basic EPS but not diluted EPS

B) diluted EPS but not basic EPS

C) neither basic nor diluted EPS

At the beginning of the year, BJC Company had 40,000 shares of $1 par common stockoutstanding On April 1, BJC issued a 2-for-1 stock split and on July 1, BJC reacquired 20,000shares On October 1, BJC issued 8,000 shares of $10 par, 5% cumulative preferred stock.How many shares should BJC use to calculate diluted earnings per share?

(Module 18.4, LOS 18.g)

The following data pertains to the McGuire Company:

Net income equals $15,000

5,000 shares of common stock issued on January 1

10% stock dividend issued on June 1

1000 shares of common stock were repurchased on July 1

1000 shares of 10%, par $100 preferred stock each convertible into 8 shares of

common were outstanding the whole year

What is the company's basic earnings per share (EPS)?

A) $2.50

B) $1.20

C) $1.00

Explanation

Number of average shares:

1/1 5,500 shares issued (includes 10% stock dividend on 6/1) × 12 = 66,0007/1 1,000 shares repurchased × 6 months = 6,000

Firewalz, Inc., had 500,000 shares of common stock and 20,000 shares of 6%, $100 parpreferred stock outstanding at the beginning of the year Each share of the preferred can beconverted into two shares of common stock On July 1, the company repurchased 100,000shares of its common stock If net income for the year is $1.2 million, the reported dilutedEPS for the year is closest to:

A) $2.42

B) $2.45

C) $2.40

Preferred dividends = 6% × $100 × 20,000 = $120,000

Basic EPS = ($1.2 million – $120,000) / [500,000 – (0.5)100,000] = $2.40

The preferred dividend per common share that results from conversion = $120,000 / (2 ×20,000) = $3.00, which is greater than $2.40 The preferred is antidilutive (conversionwould not reduce EPS) Therefore, reported diluted EPS will be the same as basic EPS:

$2.40

(Module 18.4, LOS 18.g)

During 2007, Topeka Corporation entered into the following transactions:

Transaction #1 – Interest on a certificate of deposit owned by Topeka was

credited to Topeka's investment account

Transaction #2 – Topeka sold 10,000 shares of common stock at $30 that hadbeen repurchased by Topeka last year for $20

Should Topeka recognize the results of these transactions as income on the income

statement for the year ended December 31, 2007?

A) Both should be recognized

B) Neither should be recognized

C) Only one should be recognized

Explanation

Interest earned on the CD is recognized as interest income The gain on the sale of

treasury stock is not reported on the income statement but is reflected on the statement

of changes in stockholders' equity and on the balance sheet The sale proceeds simplyincrease equity and increase cash

(Module 18.1, LOS 18.a)

An analyst prepares the following common-size income statements for Perez Company:

Based only on this information, Perez's improving net profit margin is most likely a result of:

A) greater nancial leverage

B) controlling operating expenses

C) improving gross margins

Explanation

The improvement in net profit margin from 15% to 17% appears to result mainly from thefirm reducing selling and administrative expense from 16% of sales to 9% of sales, thusdecreasing operating expenses from 66% to 62% of sales Gross margin is decreasing overthis period because cost of goods sold is increasing as a percentage of sales While

financial leverage cannot be determined directly from the income statement, the fact thatinterest expense is a constant percentage of sales suggests financial leverage is stable.(Module 18.5, LOS 18.j)

Changes in asset lives and salvage values are changes in accounting:

A) principle and are applied retrospectively

B) estimates and are applied retrospectively

C) estimates and are applied prospectively.

Explanation

Changes in asset lives and salvage value are changes in accounting estimates and are notconsidered changes in accounting principle Changes in accounting estimates are appliedprospectively

(Module 18.3, LOS 18.e)

Stanley Corp had 100,000 shares of common stock outstanding throughout 2004 It also had20,000 stock options with an exercise price of $20 and another 20,000 options with anexercise price of $28 The average market price for the company's stock was $25 throughoutthe year The stock closed at $30 on December 31, 2004 What are the number of sharesused to calculate diluted earnings per share for the year?

Zachary Company's warrants issued in 2000 are Zachary's only outstanding potentiallydilutive security In 2005, EPS and Dilutive EPS differed for the first time A possible

explanation for the change is the:

A) average market price of Zachary decreased

B) average market price of Zachary increased

C) year-end market price of Zachary increased

Explanation

An increase in average market price could cause Zachary's warrants to go from antidilutive

to dilutive If the average price of the stock increases during the year, the warrants arelikely to be exercised at some point during the year Neither of the other choices would dothis

(Module 18.4, LOS 18.h)

Matrix, Inc.'s common size income statement for the years ended December 31, 20X1 and20X2 included the following information (percent of net sales):

Analysis of this data indicates that from 20X1 to 20X2:

A) cost of goods sold increased

B) interest expense per dollar of sales declined

C) the e ective tax rate increased

Explanation

On a common size income statement, all amounts are stated as a percentage of sales.Interest expense per dollar of sales has declined from 0.15 to 0.06 The other

interpretations listed are not necessarily correct COGS increased as a percentage of sales,but if sales decreased, COGS may have decreased as well The company's effective tax rate(income tax expense / pretax income) can be calculated from a common-size incomestatement Here the effective tax rate was 33% in both years

(Module 18.5, LOS 18.j)

How will dilutive securities affect earnings per share (EPS) when determining diluted

earnings per share?

Dilutive securities such as convertibles and options are found in a complex capital

structure and always decrease EPS Convertibles and options may also be antidilutive,which will increase EPS hence the name antidilutive The only way to know if a security isdilutive or antidilutive is to compare the basic EPS to diluted EPS If the diluted EPS ishigher than the basic EPS then the security is antidilutive and should not be included whendetermining diluted EPS

(Module 18.4, LOS 18.h)

According to the standards for revenue recognition, a promise to transfer a distinct good orservice is most accurately described as a:

A) contract

B) performance obligation

C) transaction

Explanation

Performance obligations within a contract are defined as promises to transfer distinctgoods or services.

(Module 18.2, LOS 18.b)

Selected information from Doors, Inc.'s financial activities in the year 2005 included thefollowing:

Net income was $372,000

100,000 shares of common stock were outstanding on January 1

The average market price per share was $18 in 2005

Dividends were paid in 2005

2,000, 6 percent $1,000 par value convertible bonds, which are convertible at a ratio

of 25 shares for each bond, were outstanding the entire year

Doors, Inc.'s tax rate is 40%

Doors, Inc.'s diluted earnings per share (Diluted EPS) for 2005 was closest to:

$444,000

Diluted EPS was $444,000 / (100,000 + (2,000 × 25)) = $2.96

(Module 18.4, LOS 18.h)

Which of the following statements regarding making changes in accounting principles is least

accurate?

A) The general rule is retrospective application.

B)

A change in accounting principle is a change from one generally accepted

accounting principle to another generally accepted principle The rm making

the change must justify the change

C)Changes in accounting estimates are now treated the same as changes in

accounting principles

Explanation

Changes in accounting estimates are not treated the same as changes in principles

Changes in principles are treated retrospectively, whereas changes in accounting

estimates are accounted for in the current and future periods Both remaining statementsare accurate

(Module 18.3, LOS 18.e)

An analyst has gathered the following information about a company:

110,000 shares of common outstanding at the beginning of the year

The company repurchases 20,000 of its own common shares on July 1

Net income is $300,000 for the year

10,000 shares of existing 10 percent cumulative $100 par preferred outstanding that

is not in arrears at the beginning or ending of the year

The company also has $1 million in 10 percent callable bonds outstanding

The company has declared a $0.50 dividend on the common

What is the company's basic Earnings Per Share?

110,000−(6/12)(20,000)

Question #17 of 155 Question ID: 1457312Assume that the exercise price of an option is $6, and the average market price of the stock

is $10 Assuming 802 options are outstanding during the entire year, the number of shares

to be added to the denominator of diluted earnings per share (EPS) is closest to:

A firm with a capital structure consisting of only common stock and non-convertible bonds issaid to have a:

A) simple capital structure

B) non-diluted capital structure

C) straight capital structure

Explanation

A simple capital structure is one that contains no securities that have the potential todilute a firm's earnings per share For example, convertible bonds, convertible preferredstock, options, and warrants have the potential to dilute earnings per share upon

conversion or exercise

(Module 18.4, LOS 18.g)

Question #19 of 155 Question ID: 1457362

To convert an income statement to a vertical common-size income statement, each line itemshould be stated as a percentage of:

Pinto Corporation is an automobile manufacturer located in North America Pinto owns a 5percent interest in one of its suppliers, Continental Supply Company Each year, Pinto

receives a cash dividend from Continental Pinto's engine supplier, National Supply

Company, recently increased prices on goods sold to all customers due to higher labor costs.Should Pinto report the dividends received from Continental and the price increase fromNational as an operating or nonoperating component on its year-end income statement?

A) Only one is operating

B) Both are nonoperating

C) Both are operating

The JME Jumpers, a professional volleyball team, sells season tickets to all home games Thecost of a season ticket is $1,000 and the team plays 20 home games, which run from Aprilthrough August For the year ended June 30, 2005, JME sold 1,200 tickets, collected 80

percent of the amount owed, and played 12 home games How much revenue should JMErecognize?

The approach to revenue recognition in the converged accounting standards that wereissued in May 2014 is best described as:

A) objectives-based

B) principles-based

C) rules-based

Explanation

The converged accounting standards concerning revenue recognition, issued in May 2014

by the IASB and FASB, are principles-based

(Module 18.2, LOS 18.b)

Assume that the exercise price of an option is $9, and the average market price of the stock

is $12 Assuming 992 options are outstanding during the entire year, what is the number ofshares to be added to the denominator of the Diluted EPS?

An analyst gathers the following data about a company:

The company had 1 million shares of common stock outstanding for the entire year.The company's beginning stock price was $50, its ending price was $70, and its

average price was $60

The company had 100,000 warrants outstanding for the entire year Each warrantallows the holder to buy one share of common stock at $50 per share

How many shares of common stock should the company use in computing its diluted

earnings per share?

A) 1,016,667

B) 1,083,333

C) 1,100,000

Explanation

Use the Treasury stock method:

Step 1: Determine the number of common shares created if the warrants are

exercised = 100,000

Step 2: Calculate the cash inflow if the warrants are exercised: (100,000)($50 per

share) = $5,000,000

Step 3: Calculate the number of shares that can be purchased with these funds

using the average market price ($60 per share): 5,000,000 / 60 = 83,333shares

Step 4: Calculate the net increase in common shares outstanding from the

exercise of the warrants: 100,000 − 83,333 = 16,667

Step 5: Add the net increase in common shares from the exercise of the warrants

to the number of common shares outstanding for the entire year:

1,000,000 + 16,667 = 1,016,667

(Module 18.4, LOS 18.g)

BWT, Inc shows the following data in its financial statements at the end of the year Assumeall securities were outstanding for the entire year

6.125% convertible bonds, convertible into 33 shares of common stock Issue price

9,986 warrants are outstanding with an exercise price of $38 Each warrant is

convertible into 1 share of common Average market price of common is $52.00 pershare

Common shares outstanding at the beginning of the year were 40,045

Net Income for the period was $200,000, while the tax rate was 40%

What are the basic and diluted EPS for the year?

Basic EPS Diluted EPS

C) $4.12 $3.06

Explanation

Basic EPS = Net income – preferred dividends / Weighted average shares of commonPreferred dividends:

6.25% convertible preferred stock:

Because this is less than basic EPS, these convertible bonds are dilutive

6.25% convertible preferred stock:

Preferred dividend / Common shares if converted

(100 bonds)(33) = 3,300 common shares

6.25% convertible preferred stock:

(2,315 preferred shares)(3.3) = 7,640 common shares

8% convertible preferred stock:

(2,572 preferred shares)(5) = 12,860 common shares

Warrants:

[($52 – $38) / $52] × 9,986 = 2,689 common shares

Diluted EPS = (Net income − preferred dividends + convertible preferred dividends + tax convertible debt interest) / Weighted average shares of common adjusted for exercise[($200,000 − $35,045) + $35,045 + (0.06125)($1,000)(100)(1 − 0.4)] / (40,045 + 3,300 + 7,640+ 12,860 + 2,689) = $203,675 / 66,534 shares = $3.06

after-(Module 18.4, LOS 18.h)

Using the following information for Boxes, Inc.:

Net income $53,000,000

Outstanding 7% preferred stock, par value $30,000,000

Outstanding convertible bonds, face value of $10,000,000, Issued on January 1 at parwith a coupon rate of 6% and convertible at the rate of 20 shares per 1,000 of facevalue

100,000 options at 55 outstanding all year

Tax rate 30%

3,000,000 common shares outstanding all year

Stock price 60 at year-end, average stock price over the year 50

Diluted EPS is closest to:

3,000,000+200,000

Question #27 of 155 Question ID: 1457344Orange Company's net income for 2004 was $7,600,000 with 2,000,000 shares outstanding.The average share price in 2004 was $55 Orange had 10,000 shares of eight percent $1,000par value convertible preferred stock outstanding since 2003 Each preferred share wasconvertible into 20 shares of common stock Orange Company's diluted earnings per share(Diluted EPS) for 2004 is closest to:

$7,600,000 / (2,000,000 + 200,000) = $3.45 Because if-converted EPS is higher than basicEPS, the preferred stock is antidilutive and no adjustment is made to basic EPS

(Module 18.4, LOS 18.h)

Is an acquisition of treasury stock or a loss from the write-down of inventory under thelower-of-cost-or-market rule included in comprehensive income?

Inventory write-down Acquisition of treasury stock

Explanation

Comprehensive income includes all transactions that affect shareholders' equity excepttransactions with shareholders Thus, any transaction that affects net income would alsoaffect comprehensive income Since the inventory write-down is included in net income, it

is part of comprehensive income The acquisition of treasury stock is a transaction withshareholders; thus, it is not a part of comprehensive income

(Module 18.5, LOS 18.k)

Washington, Inc.'s stock transactions during the year 20X4 were as follows:

January 1

720,000sharesissued andoutstanding

May 1

2 for 1stock splitoccurred

What was Washington's weighted average number of shares outstanding during 20X4, forearnings per share (EPS) computation purposes?

Which costs are least likely to be reported as an expense in the current accounting period?

A) Period costs