Topic: Users of Financial Statement Information

LO: 1

1. 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.

Topic: Publicly Available Financial Reports

LO: 1

2. Publicly traded companies are required to provide quarterly financial reports directly to the public.

Topic: Users of Financial Statement Information

LO: 1

3. Publicly traded companies provide financial information primarily to satisfy the SEC and the tax authorities (that is, the Internal Revenue Service).

Topic: SEC Filings

LO: 1

4. Publicly traded companies must provide to the Securities Exchange Commission annual audited financial statements (10K reports) and quarterly audited financial statements (10Q reports).

Topic: Balance Sheet

LO: 2

5. If a company reports retained earnings of $175.3 million on its balance sheet, it must also report $175.3 million in cash.

Topic: Balance Sheet

LO: 2

6. A balance sheet shows a company’s position over a period of time, whereas an income statement, statement of stockholders’ equity, and statement of cash flows show its position at a point in time.

.

Topic: Accounting Equation

LO: 2

7. Assets must always equal liabilities plus equity.

Topic: Income Statement

LO: 2

8. The income statement reports net income which is defined as the company’s profit after all expenses and dividends have been paid.

Topic: Statement of Cash Flows

LO: 2

9. A statement of cash flows reports on cash flows for operating, investing and financing activities at a point in time.

Topic: Statement of Stockholders’ Equity

LO: 2

10. An increase in treasury stock would be reflected in the statement of stockholders’ equity.

Topic: Return on Assets

LO: 3

11. Return on Assets (ROA) measures the profit the company makes on each dollar of total assets it uses.

Topic: Return on Assets

LO: 3

12. Return on Assets (ROA) = Net Income / Sales × Asset Turnover

Topic: Asset Turnover

LO: 3

13. Consider two companies (A and B) with equal profit margins of 15%. Company A has an asset turnover of 1.2 and Company B has an asset turnover of 1.5. If all else is equal, Company B with its’ higher asset turnover, is less profitable because it is expensive to turn assets over.

Topic: Financial Accounting and Business Analysis

LO: 4

14. Financial statements are influenced by five important forces that determine a company’s competitive intensity: (A) industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and (E) threat of entry.

Topic: Audit Report

LO: 5

15. A “clean” audit report asserts – among other things – that (a) the auditor has prepared all necessary financial statements and (b) management has expressed its opinion that they are prepared in conformity with GAAP.

Multiple Choice

Topic: Users of Financial Statement Information

LO: 1

1. Which of the following groups would likely not be interested in the financial statements of a large public company such as Berkshire Hathaway?

1. Shareholders
2. Employees
3. Competitors
4. Taxing agencies
5. None of the above

Topic: Users of Financial Statement Information

LO: 1

2. The SEC adopted Regulation FD, to curb public companies’ practice of:

1. Routinely filing extensions for annual reports (Form 10-K)
2. Selectively disclosing information
3. Reporting pro forma (non-GAAP) numbers
4. Hiring auditors for non-audit services such as consulting engagements
5. None of the above

Topic: Components of the Balance Sheet

LO: 2

3. A list of assets, liabilities and equity can be found on which of the following?

1. Balance Sheet
2. Income Statement
3. Statement of Assets and Liabilities
4. Statement of Cash Flows
5. Statement of Stockholders’ Equity

Topic: Balance Sheet

LO: 2

4. Which of the following items would not be found on a balance sheet? (Select all that apply)

A) Stockholders’ Equity

B) Property, plant and equipment

C) Nonowner financing

D) Sales

E) Cost of Goods Sold

Topic: Profit and Cash Flow

LO: 2

5. A company’s net cash flow will equal its net income …

A) Almost always

B) Rarely

C) Occasionally

D) Only when the company has no investing cash flow for the period

E) Only when the company has no investing or financing cash flow for the period

Topic: Financial Statement Information

LO: 2

6. 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.

Topic: Balance Sheet – Numerical calculations required

LO: 2

7. The Goodyear Tire & Rubber Company’s December 31, 2011 financial statements reported the following (in millions)

Total assets	$17,629
Total liabilities	16,005
Total shareholders’ equity	1,624
Net income (loss)	343
Retained earnings, December 31, 2010	$ 866

What did Goodyear report for Retained earnings at December 31, 2011?

A) $1,624 million

B) $1,209 million

C) $ 523 million

D) $2,833 million

E) There is not enough information to determine the answer.

Topic: Balance Sheet – Numerical calculations required

LO: 2

8. American Airlines’ 2011 balance sheet reported the following (in millions)

Total Assets	$23,589
Total Liabilities	32,626
Contributed Capital	$ 4,455

What was American Airlines’ Total liabilities and Stockholders’ Equity at December 31, 2011?

A) $23,589 million

B) $32,626 million

C) $37,081 million

D) $ 4,455 million

E) There is not enough information to determine the answer.

Topic: Balance Sheet – Numerical calculations required

LO: 2

9. On October 2, 2011 Starbuck’s Corporation reported, on its Form 10-K, the following (in millions):

Total assets	$7,360.4
Total stockholders’ equity	4,387.3
Total current liabilities	2,075.8

What did Starbuck’s report as Total liabilities on October 2, 2011?

A) $7,360.4 million

B) $2,075.8 million

C) $2,973.1 million

D) $2,311.5 million

E) None of the above

Topic: Balance Sheet – Numerical calculations required

LO: 2

10. In its 2011 annual report, Snap-On Incorporated reported the following (in millions):

Current assets	$1,530.7
Total shareholders’ equity	$1,547.3
Total liabilities	$2,125.6

What did Snap-On report as total assets at year-end 2011?

A) $3,078.8 million

B) $1,530.7 million

C) $3,656.3 million

D) $3,672.9 million

E) None of the above

Topic: Balance Sheet – Numerical calculations required

LO: 2

11. In its 2011 annual report, Kohl’s Corporation reported the following (in millions):

Total assets	$14,094
Total shareholders’ equity	$ 6,508
Total liabilities	$ 7,586

What proportion of Kohl’s Corporation is financed by nonowners?

A) 86%

B) 54%

C) 46%

D) 73%

E) None of the above

Topic: Balance Sheet – Numerical calculations required (more challenging – requires calculation of total assets before ratio can be calculated.)

LO: 2

12. In its 2011 annual report, Mattel Inc. reported the following (in millions):

Total liabilities	$3,061
Total shareholders’ equity	$2,611

What proportion of Mattel is financed by nonowners?

A) 54%

B) 37%

C) 85%

D) 46%

E) None of the above

Topic: Income Statement – Numerical calculations required

LO: 2

13. The Goodyear Tire & Rubber Company’s December 31, 2011 financial statements reported the following (in millions)

Sales	$22,767
Cost of sales	$18,821
Other expenses (excluding cost of sales)	$ 3,529

What did Goodyear report for Net income for the year ending December 31, 2011?

A) $ 3,946 million

B) $ (417) million

C) $ 417 million

D) $19,238 million

E) There is not enough information to determine the answer.

Topic: Income Statement – Numerical calculations required

LO: 2

14. Intel Corporation reported the following on its 2007 income statement (in millions)

Sales revenue	$38,334
Gross profit	$19,904
Total expenses	$12,928

What did Intel report for Cost of goods sold during 2007?

A) $25,406 million

B) $ 5,502 million

C) $18,430 million

D) $ 2,988 million

E) None of the above

Topic: Income statement – Numerical calculations required

LO: 2

15. On October 2, 2011, Starbucks Corporation reported, on its Form 10-K, the following (in millions):

	2011	2010
Total expenses	$10,452.4	$9,759.1
Operating income	1,728.5	1,419.4
Net earnings	1,248.0	948.3

What amount of revenues did Starbucks report for the year ending October 2, 2011?

A) $10,452.4

B) $ 8,723.9

C) $11,700.4

D) $12,180.9

E) None of the above

Topic: Income Statement – Numerical calculations required (more challenging, requires calculation of negative “growth” rate.)

LO: 2

16. On October 2, 2011, Starbucks Corporation reported, on its Form 10-K, the following (in millions):

	2011	2010
Operating income	$ 1,728.5	$1,419.4
Net earnings	$ 1,248.0	$ 948.3

Calculate year-over-year increase in Net earnings, in percentage terms.

A) 22%

B) 32%

C) 72%

D) 67%

E) None of the above

Topic: Income Statement – Numerical calculations required (more challenging – requires calculation of gross profit and ratios for two years.)

LO: 2

17. In its 2010 annual report, Caterpillar Inc. reported the following (in millions):

	2010	2009
Sales	$39,867	$29,540
Cost of goods sold	30,367	23,886

As a percentage of Sales, did Caterpillar’s Gross profit increase or decrease during 2011?

A) Gross profit increased from 19% to 24%

B) Gross profit decreased from 24% to 19%

C) Gross profit increased from 76% to 81%

D) Gross profit decreased from 81% to 76%

E) There is not enough information to answer the question.

Topic: Statement of Cash Flows – Numerical calculations required

LO: 2

18. The Goodyear Tire & Rubber Company’s December 31, 2011, financial statements reported the following (in millions).

Cash December 31, 2011	$ 2,772
Cash from operating activities	773
Cash from investing activities	(902)
Cash from financing activities	896

What did Goodyear report for Cash on its December 31, 2010 balance sheet?

A) $2,772 million

B) $3,539 million

C) $767 million

D) $2,005 million

E) None of the above

Topic: Statement of Cash Flows – Numerical calculations required

LO: 2

19. Procter & Gamble’s June 30, 2011, financial statements reported the following (in millions):

Cash, beginning of year	$ 2,879
Cash, end of year	2,768
Cash from operating activities	13,231
Cash from investing activities	(3,482)

What did Procter & Gamble report for Cash from financing activities for the year ended June 30, 2011?

A) $(12,628) million

B) $ 15,396 million

C) $ (15,396) million

D) $ 9,860 million

E) $ (9,860) million

Topic: Return on Assets

LO: 3

20. A company’s return on assets (ROA) can be disaggregated to reveal which of the following (select all that apply):

A) Financial leverage

B) Profit margin

C) Sales growth

D) Asset growth

E) Asset turnover

Topic: Return on Equity

LO: 3

21. The ratio of net income to equity is also known as:

A) Total net equity ratio

B) Profit margin

C) Return on equity

D) Net income ratio

E) None of the above

Topic: Return on Equity – Numerical calculations required

LO: 3

22. Sales for the year = $108,229, Net Income for the year= $13,144, Income from equity investments = $3,309, and average Equity during the year = $47,556. Return on equity (ROE) for the year is:

A) 12.1%

B) 27.6%

C) 43.9%

D) 227.6%

E) There is not enough information to answer the question.

Topic: Return on Assets – Numerical calculations required

LO: 3

23. 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

Topic: Return on Assets – Numerical calculations required (more challenging because net income is not provided, must be calculated.)

LO: 3

24. Sales for the year = $277,022, Profit margin = 16%, and average Assets during the year = $259,108. Return on Assets (ROA) for the year is:

A) 17.1%

B) 16.0%

C) 84.0%

D) There is not enough information to calculate ROA.

E) None of the above

Topic: Return on Assets – Numerical calculations required (more challenging because average assets are not provided; must be calculated.)

LO: 3

25. On December 31, 2010, Harley-Davidson, Inc., reported, on its Form 10-K, the following (in millions):

	2010	2009
Total assets	$9,431	$9,156
Total sales	4,859	4,782
Net income	147	(55)

Calculate return on assets (ROA) for 2010.

A) 1.6%

B) 51.5%

C) 71.5%

D) 9.7%

E) None of the above

Topic: Five Forces of Competitive Industry

LO: 4

26. Which of the following are not one of the five forces that determine a company’s competitive intensity? (select as many as apply)

A) Bargaining power of suppliers

B) Threat of substitution

C) Ability to obtain financing

D) Threat of entry

E) Threat of regulatory intervention

Topic: Business Environment

LO: 4

27. Which of the following are relevant in an analysis of a company’s business environment? (select as many as apply)

A) Financing

B) Labor

C) Buyers

D) Governance

E) All of the above

Topic: Clean Audit Opinion

LO: 5

28. A clean audit opinion includes which of the following assertions: (select as many as apply)

A) Financial statements present fairly the company’s financial condition

B) The auditor certifies the financials to be error free

C) The financial statements are management’s responsibility

D) Management has handled transactions efficiently in all material respects

E) All of the above

Topic: Auditor Report

LO: 5

29. The audit report is addressed to:

A) The audit committee

B) The board of directors

C) The shareholders

D) The board of directors and the shareholders

E) The Securities and Exchange Commission (SEC)

Topic: GAAP

LO: 5

30. Generally Accepted Accounting Principles (GAAP) are created by: (select all that apply)

A) The Securities and Exchange Commission

B) The Generally Accepted Accounting Principles Task Force

C) The Sarbanes Oxley Act

D) The Financial Accounting Standards Board

E) The Emerging Issues Task Force

Exercises

Topic: Financial Accounting Vocabulary

LO: 2

1. Match the item on the left to a numbered item on the right to complete each sentence.

A)	Resources that a company owns or controls are called _________________.