Financial Statement Analysis MCQ Questions With Answers Part 7

Q1- The analyst makes a down payment on the apartment he will be renting for the next six months. According to her accounting records, this payment will most likely be classified as:

A. Liability.

B. Expense.

C. Asset.


Correct Answer: C

Explanation: Rent paid in advance is a prepaid expense that is recorded as an asset on the balance sheet.


Q2- The following distinguishes a complex capital structure from a simple capital structure when determining the disclosure of diluted earnings per share: the company having outstanding: the company having outstanding:

A) debt securities or convertible securities.

B) warrants, convertible securities, or options.

C) preferred stock, warrants, or options.


Correct Answer: C

Explanation: A complex structure contains securities that have the potential to dilute the value of the structure. Options, warrants, convertible preferred stock, and convertible bonds are all examples of securities that have the potential to be converted into common shares. Simple capital structures do not contain any securities that could dilute the value of the company, but they may contain non-convertible debt securities or non-convertible preferred stock.


Q3- When a profit and loss statement explicitly shows gross profit as a subtotal, it does so by referencing a

A. Multi-step format.

B. Common-size format.

C. Single-step format.


Correct Answer: A

Explanation: Multi-step format is used when the income statement shows a subtotal for gross profit on more than one line item.

Q4- All balance sheet items are expressed as a percentage of the following amounts on common size balance sheets:

A) sales.

B) assets.

C) equity.


Correct Answer: B

Explanation: All balance sheet items are expressed as a percentage of total assets on common size balance sheets. Profit and loss statements of common size express all income statement items as a percentage of total sales.


Q5- Which of the following is the most likely reason for a company to spend money?

A. An increase in accounts payable

B. An increase in inventory

C. A decrease in accounts receivable


Correct Answer: B

Explanation: An increase in inventory (asset) constitutes a use of cash in the business.




Q6- Noncontrolling interests are typically reported under which of the following balance sheet items?

A. Assets

B. Liabilities

C. Equity


Correct Answer: C

Explanation: Noncontrolling interests (also known as minority interests) are shown on the balance sheet in the equity section as noncontrolling interests.


Q7- The operating revenues of a company for a reporting period are to be shown on the following financial statements:

A) balance sheet.

B) cash flow statement.

C) income statement.


Correct Answer: C

Explanation: The income statement of a company summarizes the company's revenues for a given reporting period. They can, but are not required to, be classified as operating and nonoperating revenues, depending on the circumstances. Because revenue may be recognized in a different period than cash is collected, cash from operating activities is presented on the company's statement of cash flows, but it is not always the same as operating revenues on the company's balance sheet. It shows the financial position of a company at a specific point in time, known as the balance sheet date.


Q8- A increase in the amount of notes payable would be classified as follows:

A) financing cash flow.

B) having no cash flow impact.

C) investing cash flow.


Correct Answer: A

Explanation: An increase in notes payable is categorized as financing cash flow in the accounting system.


Q9- Which of the following statements accurately represents information at a particular point in time?

A) Balance sheet.

B) Income statement and Balance sheet.

C) Income statement.


Correct Answer: A

Explanation: When you look at the balance sheet, you are looking at information at a specific point in time. The income statement is a representation of information gathered over a period of time, such as a year.


Q10- When a company receives cash before it recognizes the associated revenue, it is referred to as a cash-flow problem.

A. Unearned revenue liability.

B. Accounts receivable asset.

C. Prepaid expense asset.


Correct Answer: A

Explanation: In the event that a company receives cash before it recognizes the associated revenue, the company will be liable for unearned revenue.




Q11- If ABC Industries meets the following criteria, it will have better liquidity than its peer group of companies:

A) quick ratio is lower.

B) average trade payables are lower.

C) receivables turnover is higher.


Correct Answer: C

Explanation: Receivables turnover is a good indicator of receivables liquidity because receivables are converted to cash at a faster rate when they are turned over. A lower quick ratio indicates that the company has less liquidity. It is possible that lower trade payables are associated with better liquidity, but it is also possible that they are associated with very poor liquidity and a requirement from its suppliers for cash payment.


Q12- When a company's financial statements are prepared, which of the following sources of short-term liquidity is considered reliable enough to be included in the footnotes to the financial statements as a source of liquidity?

A) Revolving line of credit.

B) Factoring agreement.

C) Uncommitted line of credit.


Correct Answer: A

Explanation: An uncommitted line of credit is a line of credit where the lender is not obligated to make loans of any amount. Revolving lines of credit are typically for a longer period of time and involve an agreement to lend funds in the future up to a predetermined maximum amount in exchange for a predetermined interest rate. In most cases, factoring does not entail a commitment to purchase future receivables from the factoring company.


Q13- Because inventory quantities are stable and prices are rising, the use of LIFO will be beneficial.

A. Overstate net income.

B. Understate net income.

C. Understate inventory.


Correct Answer: C

Explanation: Because inventory quantities are stable and prices are rising, the use of LIFO will result in an understatement of inventory. By utilizing LIFO, the cost of goods sold and net income will be properly valued.


Q14- If software development costs incurred in the current period exceed the amortization of capitalized development costs incurred in prior periods, the following is the most likely net income for the current period :

A. Lower under capitalizing.

B. Lower under expensing.

C. The same under both methods.


Correct Answer: B

Explanation: An expensing company would recognize development costs in the current year on the income statement, whereas a capitalizing company would recognize amortization of previously capitalized costs as an expense on the income statement.


Q15- The following are the most likely financial statements to be evaluated by an analyst who wishes to investigate a company's financing transactions during the most recent period:

A) comprehensive income.

B) cash flows.

C) financial position.


Correct Answer: B

Explanation: Statement of cash flows is a financial statement that shows how much money a company has brought in and taken out during a reporting period through operations, investing, and financing. Financing transactions, such as the issuance of debt or stock, are recorded on the cash flow statement. It is the statement of financial position (balance sheet) that depicts the assets, liabilities, and equity of the company at a specific point in time. Financial transactions are not directly reflected in the statement of comprehensive income (income statement) of a company's operations. Income from cash operations is not included in a company's revenues, and dividends paid and debt principal repaid are excluded from the company's expenses.