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business
financial statement analysis

Questions and Answers of Financial Statement Analysis

If MARIO uses the straight-line method, the amount of depreciation expense on MARIO’s income statement related to the manufacturing equipment is closest to:A. 125,000.B. 150,000.C. 168,750.
Juan Martinez, CFO of VIRMIN, S.A., is selecting the depreciation method to use for a new machine. Th e machine has an expected useful life of six years. Production is expected to be relatively low
A financial analyst is studying the income statement eff ect of two alternative depreciation methods for a recently acquired piece of equipment. She gathers the following information about the
After reading the financial statements and footnotes of a company that follows IFRS, an analyst identified the following intangible assets:• product patent expiring in 40 years• copyright with no
BAURU, S.A., a Brazilian corporation, borrows capital from a local bank to finance the construction of its manufacturing plant. Th e loan has the following conditions:Borrowing date 1 January 2009
JOOVI Inc. has recently purchased and installed a new machine for its manufacturing plant. Th e company incurred the following costs:Purchase price $12,980 Freight and insurance $1,200 Installation
When developing forecasts, analysts should most likely :A . develop possibilities relying exclusively on the results of fi nancial analysis.B . use the results of fi nancial analysis, analysis of
A decomposition of ROE for Company A and Company B is as follows:Company A Company B FY15 FY14 FY15 FY14 ROE 26.46% 18.90% 26.33% 18.90%Tax burden 0.7 0.75 0.75 0.75 Interest burden 0.9 0.9 0.9 0.9
A decomposition of ROE for Integra SA is as follows:FY12 FY11 ROE 18.90% 18.90%Tax burden 0.70 0.75 Interest burden 0.90 0.90 EBIT margin 10.00% 10.00%Asset turnover 1.50 1.40 Leverage 2.00 2.00
An analyst compiles the following data for a company:FY13 FY14 FY15 ROE 19.8% 20.0% 22.0%Return on total assets 8.1% 8.0% 7.9%Total asset turnover 2.0 2.0 2.1 Based only on the information above, the
Th e company’s total assets at year-end FY9 were GBP 3,500 million. Which of the following choices best describes reasonable conclusions an analyst might make about the company’s effi ciency?A .
An analyst observes the following data for two companies:Company A ($) Company B ($)Revenue 4,500 6,000 Net income 50 1,000 Current assets 40,000 60,000 Total assets 100,000 700,000 Current
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
An analyst is interested in assessing both the effi ciency and liquidity of Spherion PLC. Th e analyst has collected the following data for Spherion:FY3 FY2 FY1 Days of inventory on hand 32 34 40
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 fl ow?Year Ended Income Statement Item
Jaderong Plinkett Stores reported net income of $25 million. Th e company has no outstanding debt. Using the following information from the comparative balance sheets (in millions), what should the
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
An analyst gathered the following information from a company’s 2010 fi nancial statements (in $ millions):Balances as of Year Ended 31 December 2009 2010 Retained earnings 120 145 Accounts
An analyst gathered the following information from a company’s 2010 fi nancial statements (in $ millions):Year ended 31 December 2009 2010 Net sales 245.8 254.6 Cost of goods sold 168.3 175.9
Equity equals:A . Assets – Liabilities.B . Liabilities – Assets.C . Assets + Liabilities.
During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. Th e builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000
At the beginning of 2009, Florida Road Construction entered into a contract to build a road for the government. Construction will take four years. Th e following information as of 31 December 2009 is
Fairplay had the following information related to the sale of its products during 2009, which was its fi rst year of business:Revenue $1,000,000 Returns of goods sold $ 100,000 Cash collected $
Denali Limited, a manufacturing company, had the following income statement information:Revenue $4,000,000 Cost of goods sold $3,000,000 Other operating expenses $ 500,000 Interest expense $ 100,000
An example of an expense classifi cation by function is:A . tax expense.B . interest expense.C . cost of goods sold.
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
An analyst has collected the following information regarding a company in advance of its year-end earnings announcement (in millions):Estimated net income $ 200 Beginning retained earnings $ 1,400
analyze and interpret how balance sheet modifi cations, earnings normalization, and cash fl ow statement related modifi cations aff ect a company’s fi nancial statements, fi nancial ratios, and
evaluate how a given change in accounting standards, methods, or assumptions aff ects fi nancial statements and ratios;
evaluate the quality of a company’s fi nancial data, and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for diff erences in
identify fi nancial reporting choices and biases that aff ect the quality and comparability of companies’ fi nancial statements, and explain how such biases may aff ect fi nancial decisions;
demonstrate the use of a framework for the analysis of fi nancial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparables, critiquing a credit rating,
describe sources of information about risk.
evaluate the balance sheet quality of a company;
describe indicators of balance sheet quality;
evaluate the cash fl ow quality of a company;
describe indicators of cash fl ow quality;
evaluate the earnings quality of a company;
explain mean reversion in earnings and how the accruals component of earnings aff ects the speed of mean reversion;
describe indicators of earnings quality;
describe the concept of sustainable (persistent) earnings;
evaluate the quality of a company’s fi nancial reports;
describe how to evaluate the quality of a company’s fi nancial reports;
explain potential problems that aff ect the quality of fi nancial reports;
demonstrate the use of a conceptual framework for assessing the quality of a company’s fi nancial reports;
analyze how currency fl uctuations potentially aff ect fi nancial results, given a company’s countries of operation.
explain how changes in the components of sales aff ect earnings sustainability;
describe how multinational operations aff ect a company’s eff ective tax rate;
analyze how alternative translation methods for subsidiaries operating in hyperinfl ationary economies aff ect fi nancial statements and ratios;
analyze how the current rate method and the temporal method aff ect fi nancial statements and ratios;
calculate the translation eff ects and evaluate the translation of a subsidiary’s balance sheet and income statement into the parent company’s presentation currency;
compare the current rate method and the temporal method, evaluate how each aff ects the parent company’s balance sheet and income statement, and determine which method is appropriate in various
analyze how changes in exchange rates aff ect the translated sales of the subsidiary and parent company;
describe foreign currency transaction exposure, including accounting for and disclosures about foreign currency transaction gains and losses;
distinguish among presentation (reporting) currency, functional currency, and local currency;
analyze how diff erent methods used to account for intercorporate investments aff ect fi nancial statements and ratios.
distinguish between IFRS and US GAAP in the classifi cation, measurement, and disclosure of investments in fi nancial assets, investments in associates, joint ventures, business combinations, and
describe the classifi cation, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in fi nancial assets, 2) investments in associates, 3) joint
explain how accounting for stock grants and stock options aff ects fi nancial statements, and the importance of companies’ assumptions in valuing these grants and options.
explain issues associated with accounting for share-based compensation;
interpret pension plan note disclosures including cash fl ow related information;
explain and calculate how adjusting for items of pension and other post-employment benefi ts that are reported in the notes to the fi nancial statements aff ects fi nancial statements and ratios;
explain and calculate the eff ect of a defi ned benefi t plan’s assumptions on the defi ned benefi t obligation and periodic pension cost;
describe the components of a company’s defi ned benefi t pension costs;
explain and calculate measures of a defi ned benefi t pension obligation (i.e., present value of the defi ned benefi t obligation and projected benefi t obligation) and net pension liability(or
describe the types of post-employment benefi t plans and implications for fi nancial reports;
identify the key provisions of and diff erences between income tax accounting under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (GAAP).
analyze disclosures relating to deferred tax items and the eff ective tax rate reconciliation, and explain how information included in these disclosures aff ects a company’s fi nancial statements
compare a company’s deferred tax items;
describe the valuation allowance for deferred tax assets—when it is required and what impact it has on fi nancial statements;
distinguish between temporary and permanent diff erences in pre-tax accounting income and taxable income;
evaluate the impact of tax rate changes on a company’s fi nancial statements and ratios;
calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the fi nancial statements related to a change in
calculate the tax base of a company’s assets and liabilities;
explain how deferred tax liabilities and assets are created and the factors that determine how a company’s deferred tax liabilities and assets should be treated for the purposes of fi nancial
describe the diff erences between accounting profi t and taxable income, and defi ne key terms, including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income
What are the company’s business model and strategy, and how did they infl uence the company’s performance as refl ected in, for example, its sales growth, effi ciency, and profi tability?
What aspects of performance are critical for a company to successfully compete in its industry, and how did the company perform relative to those critical performance aspects?
How do the level and trend in a company’s profi tability, effi ciency, liquidity, and solvency compare with the corresponding results of other companies in the same industry? What factors explain
How and why have corporate measures of profi tability, effi ciency, liquidity, and solvency changed over the periods being analyzed?
How can diff erences in accounting methods aff ect fi nancial ratio comparisons between companies, and what are some adjustments analysts make to reported fi nancials to facilitate comparability
How can fi nancial statement analysis be used to screen for potential equity investments?
How can fi nancial statement analysis be used to evaluate the credit quality of a potential fi xed-income investment?
How can an analyst approach forecasting a company’s future net income and cash fl ow?
What are the key questions to address in evaluating a company’s past fi nancial performance?
explain appropriate analyst adjustments to a company’s fi nancial statements to facilitate comparison with another company.
describe the use of fi nancial statement analysis in screening for potential equity investments;
describe the role of fi nancial statement analysis in assessing the credit quality of a potential debt investment;
forecast a company’s future net income and cash fl ow;
evaluate a company’s past fi nancial performance and explain how a company’s strategy is refl ected in past fi nancial performance;
describe accounting warning signs and methods for detecting manipulation of information in fi nancial reports.
describe accounting methods (choices and estimates) that could be used to manage earnings, cash fl ow, and balance sheet items;
describe presentation choices, including non-GAAP measures, that could be used to infl uence an analyst’s opinion;
describe mechanisms that discipline fi nancial reporting quality and the potential limitations of those mechanisms;
describe conditions that are conducive to issuing low-quality, or even fraudulent, fi nancial reports;
describe motivations that might cause management to issue fi nancial reports that are not high quality;
distinguish between conservative and aggressive accounting;
describe a spectrum for assessing fi nancial reporting quality;
distinguish between fi nancial reporting quality and quality of reported results (including quality of earnings, cash fl ow, and balance sheet items);
calculate and interpret leverage and coverage ratios.

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